Three Keys to Financial Fitness

Old KeysI was planning on writing about a new survey from Prudential Retirement Services today. It is a very interesting survey from 2006-2011 of primary or joint financial decision makers who are between 45-75, have a household income of at least $100,000 ($50,000 if already retired), household investable assets of at least $100,000, and retirement savings of at least $100,000. Many who fall in this “retirement red zone” have serious concerns about their ability to maintain lifestyle in retirement.

For those of you who would like to read the study, here’s a link to the Prudential website: http://news.prudential.com/images/20026/2011ChangingAttitudesAboutRetIncome.pdf

It is worth reading, but if you currently have debt, I’d like to focus on those who were included in the Prudential survey. They have concerns about maintaining their lifestyle and they have incomes of at least $50,000 in retirement. They didn’t get there by creating, maintaining, and living with debt. Many of us dream of being millionaires but we need to focus on one of the stepping stones on the path to millions – eliminating debt.

In other words, we need to make sure we might be included in a survey like this one when we are 45-75 and many of us are already there from an age perspective. To get to the income and investments of those included in the survey requires the development of a few habits.

Spend less than you earn

Of course you need to know what you really earn before you can know if you are spending less. Ignore your gross income and take a close look at your paycheck. How much ends up in your bank account each payday? If you are participating in a retirement plan, you already receive less than you earn each payday so add any deductions for retirement accounts like 401k’s, 403b’s, and IRA’s. Take that number and multiply it times the number of paydays you have per year. The answer is what you earn. And keep investing in your retirement plan, particularly if you company has a matching contribution.

Establish and maintain an emergency fund

To make sure you spend less than you earn, setup automatic transfers from your checking account to savings. Yes, I am aware that savings accounts don’t pay anything these days. But paying yourself is important even if you don’t get interest because you are less likely to consider your savings account when you are shopping! This savings account is your emergency fund. If you are working, you should have at least three months of your earnings in savings. Personally, I recommend six months.

Establish and maintain an investment account

Once you reach your goal for the savings account establish an investment account with an investment firm or mutual fund company and begin automatic transfers each month to this account. The investments should go directly into a mutual fund each month. There is a great deal of material on the internet, in books, and from professionals to help you select a fund and I’ll address the topic of investment selection in a future post. Regardless of market conditions, make your investment each month.

If you develop these three habits, you will need less income in retirement. Why? Because you have developed a habit of spending less than you earn. If you make $40,000 gross and, after taxes and Social Security withholding, take home $32,000 and pay yourself first you will find that you spend money like someone making $25-28,000. Start that habit in your twenties and it is very hard to break!

Gee, I left something out didn’t I? Debt! You need to take the three steps above while eliminating your debt. You cannot afford to put off these three habits until your debt is paid off because time is a critical factor when it comes to personal finance and investing. Reduce your debt and pay yourself at the same time. You can find plenty of advice and resources here at Enemy of Debt to help you eliminate debt. My point is that you need to find a way to spend less than you earn, maintain and emergency fund, and maintain an investment account at the same
time.

Easier said than done. But, that’s why doing it will put you in the top, financially speaking!

And remember, money is not your life, it is simply the means to the life you want!

Photo Credit – Jake Liefer via Flickr

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One Response to “Three Keys to Financial Fitness”

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  1. This line – “And remember, money is not your life, it is simply the means to the life you want!” – resonated with me in a huge way. It’s so easy to forget that money is only a vehicle to gain access to the things I REALLY want in life. If I didn’t have auto transfers set up, I’d probably never be able to save for the things I want. But sometimes saving seems like the end instead of the means.

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