How would you do in a financial Olympics?
Watching the payoff of so much training in the Olympics can be a motivator for our own achievements. While you won't be winning medals for your financial accomplishments, you could gain something arguably even more valuable: financial security and independence for you and your family. Still, it helps to have more concrete goals to measure your progress against so here are some "financial” Olympic events, along with "medals" to shoot for.
Event 1: Money management
To participate in this event, you'll need to track your income and expenses over at least 3 months to get an average. Most of us know what we take home each month but knowing what we spend can be a little trickier. When people try to estimate where their money is going and then compare it with reality, they usually end up being quite surprised.
One way is to simply look at bank and credit card statements and then record the expenses by category on a worksheet. Another is to use a website or app that will monitor your cash flow online for free. Neither approach is necessarily better. Just like the best exercise, the best method is the one you'll actually do, so go with what you're more comfortable with.
Don't forget those non-monthly expenses like vacations and holidays. See what you spent last year and divide that number by 12 to convert it into a monthly expense. Ideally, you could then have that amount set aside automatically each month in a separate account so the money will be there when you need it. You may not earn much interest with today's rates, but it sure beats putting those expenses on a credit card and paying interest on them.
Finally, there are always those unexpected emergency expenses that we can't plan for. Since one of the worst is losing your job, a rule of thumb is to have enough savings to cover at least 3-6 months of necessary expenses, and ideally 6-9 months. If your job is high risk, you may even want to have a full year's worth.
Bronze: You spend less than you make each month. If this is a challenge, see if you can use some money-saving ideas to cut back on some of your expenses. If debt is a challenge, you might want to consider negotiating down the payments.
Silver: You pay all your credit card bills in full to avoid paying any interest. If you have high-interest debt like credit card debt, put any extra payments towards the debt with the highest interest rate to pay it off as quickly as possible.
Gold: You have no high-interest debt and a sufficient amount in emergency savings. Be sure to keep those savings someplace safe and secure like a savings account or money market fund, and only tap into it for real emergencies.
Event 2: Retirement planning
For this event, you'll need to start by thinking about what your retirement goals are. When do you plan to retire? Where would you like to live? What do you see yourself doing?
You can then use a retirement budgeting worksheet to estimate how your expenses might change. For example, if you're planning to retire in 20 years, and you have 15 years left on your mortgage, your housing expenses would go down. On the other hand, you may spend more on travel, and if you're retiring before you qualify for Medicare at age 65, you may spend more on health care too.
Your next step is to see what resources you'll have for retirement. You can get an estimate of your Social Security benefits on their website. You can also ask your current and former employers for a projection of any pension benefits you may be receiving. Finally, take a look at all of your retirement accounts (current and former employers' plans, IRAs, and retirement investments in regular accounts) and how much you're contributing to them. Once you have this information, you can run a basic retirement projection to see whether you're on track to meet your retirement goals.
Bronze: You're saving enough to at least get the full match in your employer’s retirement account. You don’t want to leave any of that free money on the table.
Silver: You’re saving enough to meet your retirement goals. If not, use the calculator to see the effect of retiring later and/or saving more. While jumping immediately from a 6% contribution rate to 10% or 15% may not be feasible, how about a 1% increase? If your employer's plan has a contribution rate escalator, this is a great way to have your contributions automatically increase slowly over time until you're saving enough to be on track. Otherwise, you'll need to increase your savings yourself.
Gold: You're on track for retirement and your investments are optimally allocated to match your risk tolerance and to minimize taxes and other costs on your investments. Be sure you’re taking full advantage of your employer’s retirement plan(s), IRAs and HSAs (if you can.)
Event 3: Insurance and estate planning
You can do a great job building up your wealth, only to lose it all with one unfortunate event. Here, you'll just need to see what insurance policies and estate planning documents you have. Don't forget to include employee insurance benefits and beneficiary designations on things like insurance policies, retirement accounts and trusts.
Bronze: You have enough medical, life and disability insurance to protect you and your family in case something were to happen to you.
Silver: All of the above and you also have enough long-term care insurance to protect your assets from having to be spent down to qualify for Medicaid in the event you need long-term care.
Gold: All of the above and you've taken the steps to protect your estate from probate and, if applicable, estate taxes.
So, how many medals did you win? If you didn't do so great, don't be discouraged. It takes the best athletes years of training with top advisers so you might want to consider seeking expert assistance. You can ask your employer if they offer free access to financial coaching through a workplace financial wellness program or hire a financial planner on your own.
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