Every January, some of us look in the mirror, dust-off our running sneakers, and set advantageous goals to lead a healthier and more active lifestyle. Unfortunately, little time or attention is given to address and fix our own fiscal well-being. Similar to setting health goals, financial planning goals can be best achieved if they are specific and realistic. Goals should have a time frame to implement and be written on paper. The following are the top five recommended financial principles to live by.
1. Eliminate Debt. Create an action plan and timeline to pay off your credit card debt as soon as possible (for example, over the next 18 months) and defer any major purchases until you can pay for them with cash. Develop a monthly budget and track your expenses on a spreadsheet or a mobile phone application. Dedicate any available discretionary cash flow to aggressively eliminate your credit card debt. Pay off debts with the highest interest rates first. Be careful to not quickly consolidate and close out any existing lines of credit, as that could adversely affect your credit score. Also, if you are a baby boomer nearing retirement with a mortgage, create an action plan to pay off that obligation within four years, before or after, your retirement goal.
1. Eliminate Debt. Create an action plan and timeline to pay off your credit card debt as soon as possible (for example, over the next 18 months) and defer any major purchases until you can pay for them with cash. Develop a monthly budget and track your expenses on a spreadsheet or a mobile phone application. Dedicate any available discretionary cash flow to aggressively eliminate your credit card debt. Pay off debts with the highest interest rates first. Be careful to not quickly consolidate and close out any existing lines of credit, as that could adversely affect your credit score. Also, if you are a baby boomer nearing retirement with a mortgage, create an action plan to pay off that obligation within four years, before or after, your retirement goal.
2. Protect your credit score. Regardless of your age, your credit score may come into play for many critical activities like applying for short term/long term loans. Protect and improve your credit score by keeping your balances low and paying off the majority of your expenditures every month.
3. Create a 'rainy day' fund. Develop a cash reserves bucket. Most people (before or after retirement) do not have enough cash reserves handy to get by for even two months in case of emergency or unemployment. They then start relying on retirement accounts, credit cards, family and personal loans to pay their bills and put food on the table.
4. Increase your retirement savings. Many Indians are significantly under-prepared to retire by age of 58 due to insufficient savings and end up dependent on Social Security as their primary income resource. Lack of planning and work-place financial education seems to be an ongoing epidemic in today’s society. Make a conscious effort to put off short term (instant gratification) purchases and instead make retirement savings a monthly expense item on your balance sheet with every pay-check. Dedicate at least 40% of your annual gross earnings for this goal.
A good rule of thumb to consider is that you may need 20 to 25 times your final salary in a lump sum to retire successfully (considering a 8% portfolio distribution rate in retirement). Work with a financial planner to assess your specific retirement budget and lifestyle goals on paper and then put together an action plan to achieve them. Once you retire, continue working with your trusted adviser to implement an ongoing investment and income distribution plan to keep you on track for the long run. Remember that in the end, you can't put your retirement on a credit card.
Finally, carefully review all of your investment and insurance account beneficiary designations to make sure they mesh with your current goals and wishes for your family and estate.
