If you have been in debt repayment mode for a long time, you may not be thinking about what steps to take when you are finally free from those payments. Here are some easy strategies to follow, after you have paid off your debt.
One of the most important tools you can use to strengthen your financial standing is to have an adequate emergency fund. This means having 3 to 6 months of living expenses in a savings account or other readily accessible location. This will help protect you against unforeseen circumstances such as an extended illness or injury, temporary unemployment, or significant vehicle repair costs. Single people and single-income families may be better off with 6 months of expenses in an emergency account, due to the absence of another ongoing income source.
Another important way to protect and grow your net worth is to increase the amount you contribute to your retirement account. Whether you have an employer-sponsored retirement plan or an IRA, this is an easy way to save for your future. Beginning and increasing your retirement contributions at an early age is a great way to take advantage of compounding (earnings on your earnings) so that you won’t have to play “catch up” later in life. Not only will these contributions grow your retirement nest-egg, any pre-tax contributions will lower your current taxable income.
Most 401k/403b plans have a limit to the amount that the employer will match, but you are able to contribute up to $18,000 each year to your account ($24,000 if you are over age 50). IRAs have a lower contribution limit of $5,500 ($6,500 over age 50) but still offer tax advantages.
Having the discipline to save sooner rather than later, along with a concrete plan to do so, is a great way to help meet your long-term financial goals.
By: Ross G. Allen, CFP ®