When you are in your 20s you can make some financial mistakes and have time to recover. Move on 20 years and you have halved the time between when the typical person sets out on a career and when they retire. Retirement seems remote when you have just finished college. There will be several calls on your first pay check and if you are not careful you will begin to respond to calls each year, none of which involve saving. If that is still the case as you are halfway to retirement you have a problem.
As people live longer they need more in their retirement fund to guarantee a comfortable time. Those who have slipped into the habit of spending all they earn without making proper provisions for retirement have little chance in a comfortable retirement if they are already in their 40s without anything of significance set aside. Some may point to the real estate they have bought as an appreciating asset that can help with retirement but there will always be the need to find something else if they intend to use the equity in their real estate to pay their bills each month.
Mistakes in your 40s are potentially very damaging. Buying real estate should not be a mistake but the recession was a setback that those who had invested unwisely found hard to recover from. It is important to identify potential mistakes and how can you avoid them in the first place or how do you recover?
It may be hard to put anything aside from your first paycheck but you should do it even if it is only a token amount. If you get into the habit of saving immediately the amount that you put aside can always be increased. If you even start with $50 a month and you can achieve 5% growth that would achieve around $75,000 in 40 years. If you look at the numbers of Americans today with virtually nothing they would have more if they had even saved $10.
The danger of not saving increases by the year. As you earn money access to credit becomes easier. Credit card companies marketed their products fairly aggressively prior to the recession; many people had multiple cards and spent on things they could not afford. It ranged for cars to holidays and the result was often large credit card balances on which they could only afford the minimum monthly payment. The balances were here to stay and saving was no longer an alternative.
Federal Reserve data bears out the fact that people’s level of debt increases through the two decades after they start work and saving often gets pushed aside. Do you see the picture emerging and are you one of those in this situation?
Get Rid of the Cards
Before you even look at anything else add up your current debts. If you have significant debts on credit cards you are paying a high rate of interest. Paying the minimum the card company requires means your credit score is not harmed but you will hardly be reducing your level of debt. The answer is to take out a personal loan. If you have a full time job and regular income you should be eligible for a personal loan as long as the amount you request is realistic.
The rate charged on a personal installment loan will be far lower than the rate credit card companies charge. You will be ‘’saving’’ yourself money immediately.
Make a Budget
The process of ‘’saving’’ yourself money is part of the process of good financial management. That requires a budget that lays out your earnings and spending every month. The figures may look fairly poor if you have spent whatever you have earned for years and made no attempt to save. You have to look at ways to improve those figures so that you create a monthly surplus.
The personal loan installment may not improve the figures immediately but you will no longer have those card balances outstanding. It is a bit like a business. The balance sheet will look so much better because your liabilities will have gone. Your cash flow needs to be addressed and that requires your analyzing your expenditure and looking for savings. You may find them within your regular monthly items of expenditure. That may be on your utilities, your telephone network provider or your insurance.
If you can economize on your small daily spending that will help as well. Even if you spend $3 less a day you will have $100 at the end of the month. Where else would you put that except into savings?
A budget does not work if you are not able to change your spending habits. You cannot pay off your credit card balances and simply start using the cards again as you did before. You may well need a credit card for convenience but you should never again buy something that you cannot pay for in full when the statement comes in.
If you start to follow a budget properly and it shows a surplus then you are in the position to save. Where you want to place your money is the subject of another day but the sooner you are setting aside money the better your future prospects. Time is not on your side in later life so the sooner you act the better.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.