If you’re able to consistently save some of your earnings, perhaps you’ve built good habits such as tracking your spending, starting a monthly savings plan and avoiding impulse purchases. Now is the time to start thinking more broadly to save for long-term goals, and figure out where your financial priorities lie.
Even if you have many years of work in front of you, it’s smart to start setting aside money for retirement. You should enroll in your company’s retirement plan and start making contributions to a basic index fund that tracks a broad stock market index or a lifecycle fund based on your retirement date. Many retirement plans include a company “match”—for instance, for every dollar you put in, the company adds a dollar, up to a certain percentage. If you don’t take advantage of the company match by signing up for the plan and maximizing your contribution, you’re effectively passing up free money. It’s like walking past a $20 bill on the sidewalk and not picking it up.
Financial emergencies are going to happen, whether they are a job loss or a family crisis that requires a last-minute plane trip. When emergencies hit, you need to have a reserve fund that can cover your living expenses. Most advisors recommend setting aside three to six months of living expenses in a savings account you can access quickly. This is when it helps to track your spending, so you’ll have a sense of what you actually need each month and what you can save.
Some people think they can simply rely on their credit card in an emergency, but that can compound your problems if you’re unable to pay off the bill quickly. You may end up paying interest charges on the amount borrowed for months or years into the future. For example, paying off the monthly minimum of $20 on a $600 charge will take you three years and cost you $157 in additional interest. If you pay off the bill in two years, you’ll pay $99 in interest charges, and over one year you’ll pay $50 in interest charges.
Once your emergency fund is set up, you need to prioritize your savings between short-term and long-term goals:
In general, the sooner you need the money, the more conservative you need to be with how you save and invest. For retirement accounts, you can tolerate much bigger risks if you have many years until you retire. If the stock market has a sudden decline and your retirement account goes down in value as a result, you likely have decades to recoup your investment.
A big part of financial intelligence is making sure that your goals and your reality line up. If you want to buy a house someday, and you’ve saved little toward that goal, you’re going to need to step up your savings or you won’t get there. (Many home lenders require a down payment of 20%. For a $250,000 house, that’s $50,000, plus closing costs.) That doesn’t mean you can’t achieve your dream, but it does mean you might need to make some hard choices. Maybe you’ll need to get a roommate to cut down on living expenses, or give up your car and rely on mass transit and a sturdy bike. It also may mean you ultimately buy a townhouse instead of a house. Whatever your goals are, make sure they line up with your financial reality and you have a savings plan to get there.
Please note, the target date for lifecycle funds is the approximate date when investors plan to start withdrawing their money. The principal value of the fund(s) is not guaranteed at any time, including at the target date.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results.
TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit www.tiaa-cref.org for details.
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