Strategy 2: Ask your employer
Strategy 1: Talk about it
Put simply: Try to communicate more with your partner (should you have one) about your household’s finances
And for more information: We found that Financially Fit households contained couples who communicated more about the household’s finances. Try to regularly discuss, and work out strategies together for how to deal with, your household’s finances. Also, try to share any understanding that you might gain about managing your household’s finances with your partner, because it seems as if two heads are better than one when it comes to getting Financially Fit.
Put simply: Ask your employer for information about any available financial and retirement advice and plans within your workplace
And for more information: We found that the most Financially Fit households contained couples, and wives in particular, who had often sought out financial information from their employers. Not all employers offer retirement plans or will refer you to professionals who can provide you with financial advice. However, if you have an employer that offers these services, take advantage of any information they can provide about these services. You may discover that your employer offers more retirement and related benefits than you first thought.
Strategy 3: Work out what you’ll need
Put simply: Work out now how much money you think you will need to live on during retirement
And for more information: No matter what your age now, the sooner you work out how much money you’ll need for retirement, the better. We found that the most Financially Fit householders had attempted to work this out quite frequently. There are a variety of ways to learn how to do this. Many government and non-profit agencies have free resources to help you learn (e.g., American Savings Education Council: http://www.choosetosave.org/ballpark/). You can also consult a financial professional, such as a certified financial planner (search for one via the certified financial planner website: www.cfp.net), although these professionals usually charge after the first consultation.
Strategy 4: Forecast what you’ll have
Put simply: Forecast how much money you think you will have by the time you will retire
And for more information: As a counterpart to Strategy 3, we found that the most Financially Fit households frequently worked out how much they would have as they neared retirement if they continued to save and invest the same way that they had done to that point. By working this out, and then comparing it to how much you’ll think you’ll need, you can gain some idea of how you might need to change the way you save so that you will be able to retire comfortably. To learn for free how to work this out, try using an online retirement calculators (e.g., www.bankrate.com/calculators). As mentioned above, you can also consult a financial professional, such as a certified financial planner (www.cfp.net).
Strategy 5: Maximize saving and earning interest
Put simply: Open a savings or retirement account and save something from each paycheck into it. Save up to buy expensive items such as cars.
And for more information: In our research, we found that householders in the most Financially Fit households frequently undertook two key savings activities. First, these householders owned a savings account and strived to save into it from each paycheck. So, if you don’t own a savings or retirement account, open one and try to save some amount, however small it may be, into it from each paycheck you receive. When times are tough, this is hard to do, but it’s worth evaluating your cash flow to see if there’s any excess that can be diverted towards a savings account as the interest on the savings will add up significantly over time. For example, let’s say you began at 20 years old to pay $2.50 from your bi-weekly paycheck into a CD account paying 5% interest per year and continue to do this until age 67. At age 67, the amount in your account would be a staggering $11,373.57.
Second, when the most Financially Fit householders wanted to buy an expensive item, such as a car, they saved money to pay for that item, helping them borrow less money to purchase the item. Try to forecast when you might need to purchase an expensive item and set a goal to regularly put aside some amount, however small, so that you have some available funds when it comes time to purchase the item.
Strategy 6: Minimize debt and paying interest
Put simply: Pay your household bills on time and your credit card balances in full each month. Pay a little extra towards your mortgage principle each month. Build an emergency fund.
And for more information: We found that Financially Fit householders undertook three key activities to minimize their debts and consequently their need to pay interest. First, the householders frequently paid their household bills on time and monthly credit card balances in full. This is easier said than done when times are tough. Nonetheless, failing to pay bills and credit card balances means you end up paying more than “list price” for the things you buy. Credit cards involve very high borrowing rates, so prioritize paying all of the balance each month, not just the minimum amount. Unless absolutely necessary, never buy anything using a credit card unless you already have money available to pay for it at the end of the month.
Second, the householders in our Financially Fit households paid a little extra on their mortgage principle each month. If your mortgage allows you to do this, consider paying a little extra each month as even small amounts make a big difference over time. If you borrowed $100,000 over 30 years at 6% interest, your mortgage payment would be $599.55 monthly. But if you paid an extra $7.50 per month to the principle, you would pay off your mortgage one year earlier. That’s one whole year of mortgage payments you never have to make! Check out how a little extra can make a big difference to mortgage repayments using an online mortgage calculator (e.g., www.bankrate.com/calculators).
Third, the most Financially Fit householders also helped reduce their debt by building an emergency fund. This is just like a fund saved towards the purchase of an expensive item (mentioned earlier) except that you are saving for unanticipated but critical expenses, not intended purchases. In other words, an emergency fund remains untouched but easily accessible in the case of emergencies, such as those incurred when your car, which is your only means to get to work, breaks down. Something saved in an emergency fund is better than nothing, because it helps you avoid borrowing (as much) money when an unanticipated expense suddenly presents itself; borrowing that nearly always involves you paying interest.
We’re confident that if you follow the Simple 6, you’ll be on your way to becoming more Financially Fit in no time.