The primary goal with any budget is to make sure you are on the right track when it comes to savings. Achieving and accumulating savings are the only way we have any hope of ever achieving financial health and independence.
I define financial independence as the point where you could live off your savings or investments, whether by choice or because you have to. It doesn’t mean you’re necessarily wealthy at all, but you could walk away from a job or survive a forced early retirement and do fine.
You don’t achieve this point in your life by living lavishly.
I define financial independence as the point where you could live off your savings or investments, whether by choice or because you have to. It doesn’t mean you’re necessarily wealthy at all, but you could walk away from a job or survive a forced early retirement and do fine.
You don’t achieve this point in your life by living lavishly.
It involves living well beneath your means regardless of your income, and consistent and disciplined savings practices.
It also entails putting those savings to work through a sound investment strategy, which is a topic for my blog about what investment approaches have worked for us.
To reach this savings goal, I recommend trying to save at least 20% of your income and increasing that percentage as your income rises before you increase expenditures.
It’s all too easy to give in to lifestyle creep as your earnings grow, and to let your expenses rise along with your wages.
Before you know it, you’re on a treadmill to nowhere, just working to pay the bills and never accumulating the nest egg you need to achieve financial freedom.
I strongly advise against letting that happen.
It also entails putting those savings to work through a sound investment strategy, which is a topic for my blog about what investment approaches have worked for us.
To reach this savings goal, I recommend trying to save at least 20% of your income and increasing that percentage as your income rises before you increase expenditures.
It’s all too easy to give in to lifestyle creep as your earnings grow, and to let your expenses rise along with your wages.
Before you know it, you’re on a treadmill to nowhere, just working to pay the bills and never accumulating the nest egg you need to achieve financial freedom.
I strongly advise against letting that happen.
To help avoid it, set up an automatic savings plan that deposits a portion of your paycheck directly into a savings account for you. You designate the amount and can make adjustments at will.
This strategy works because, generally speaking, money that is removed from your paycheck before you even see makes saving much easier to accomplish.
If your employer offers this benefit, then take advantage of it, or use one of the various apps available to facilitate savings.
Using this method, you’ll see your savings grow quite quickly.
Now, there are different types of savings you should be focusing on.
This strategy works because, generally speaking, money that is removed from your paycheck before you even see makes saving much easier to accomplish.
If your employer offers this benefit, then take advantage of it, or use one of the various apps available to facilitate savings.
Using this method, you’ll see your savings grow quite quickly.
Now, there are different types of savings you should be focusing on.
Emergency Fund – This is savings set aside to meet unexpected expenses, such as a car repair, a medical expense, or a dental bill, etc.
The occurrence of such an event can be unnecessarily stressful and financially devastating if you don’t have the reserves to meet it. So, accumulating a few hundred dollars in savings should be an immediate savings goal.
Once you’ve achieved that, continue to add to this fund, so that you eventually have enough to meet your living expenses for several months in the event of a job loss of any kind.
These funds will need to be easily accessible in case you need them, so they will have to be deposited into very safe – but pathetically low-earning – cash savings accounts or money market funds.
Short- and Intermediate-Term Savings Fund – This fund – which does not necessarily have to be in a separate account from your emergency savings account, is for those not-too-distant savings goals you set for yourself, such as the purchase of a new car, or the down payment on a house.
So, it’s in addition to any monies set aside for job loss.
Again, this money should be in a low-risk, cash savings vehicle, which unfortunately also means a low-earning one in this low-interest environment we are currently in.
Long-Term Savings Funds/Retirement – These savings are earmarked for use a decade or more out from the present.
They should be invested for growth and earnings in a diversified portfolio of holdings that includes stocks, bonds, real estate, and other business enterprises, etc.
The occurrence of such an event can be unnecessarily stressful and financially devastating if you don’t have the reserves to meet it. So, accumulating a few hundred dollars in savings should be an immediate savings goal.
Once you’ve achieved that, continue to add to this fund, so that you eventually have enough to meet your living expenses for several months in the event of a job loss of any kind.
These funds will need to be easily accessible in case you need them, so they will have to be deposited into very safe – but pathetically low-earning – cash savings accounts or money market funds.
Short- and Intermediate-Term Savings Fund – This fund – which does not necessarily have to be in a separate account from your emergency savings account, is for those not-too-distant savings goals you set for yourself, such as the purchase of a new car, or the down payment on a house.
So, it’s in addition to any monies set aside for job loss.
Again, this money should be in a low-risk, cash savings vehicle, which unfortunately also means a low-earning one in this low-interest environment we are currently in.
Long-Term Savings Funds/Retirement – These savings are earmarked for use a decade or more out from the present.
They should be invested for growth and earnings in a diversified portfolio of holdings that includes stocks, bonds, real estate, and other business enterprises, etc.
Achieving Financial Freedom
As I said above, financial freedom arrives when you have enough saved to live off the earnings.
Most people think of that as retirement. But becoming financially independent doesn’t have to wait until you’re in your 60’s.
By setting goals and practicing thrift, it can actually happen much sooner, as it did for us.
The fact that we continue to work and add to our savings instead of tapping into them for our living expenses already, is entirely our choice. (And to a lesser degree, it’s also due to our sense of insecurity over the high cost of healthcare. Idiscuss that topic in my blog post here.)
A life of frugal habits has paid off for us in that we are well positioned to enjoy full retirement when we decide to take it.
Now, retirement – or financial freedom - may seem very far off to someone in their twenties or thirties, but early and consistent saving is the absolute best way to ensure that you will have enough income to actually leave the work force when the time comes.
Sadly, it’s a reality in the U.S. right now that many older folks who should be considering retirement now are finding that they don’t have the funds to do so because they never saved adequately for this stage of their lives.
They are facing the grim prospect of outright poverty and/or a seriously curtailed lifestyle, or working well into their elderly years.
You want to avoid their mistake by starting your retirement savings plan early.
As I said above, financial freedom arrives when you have enough saved to live off the earnings.
Most people think of that as retirement. But becoming financially independent doesn’t have to wait until you’re in your 60’s.
By setting goals and practicing thrift, it can actually happen much sooner, as it did for us.
The fact that we continue to work and add to our savings instead of tapping into them for our living expenses already, is entirely our choice. (And to a lesser degree, it’s also due to our sense of insecurity over the high cost of healthcare. Idiscuss that topic in my blog post here.)
A life of frugal habits has paid off for us in that we are well positioned to enjoy full retirement when we decide to take it.
Now, retirement – or financial freedom - may seem very far off to someone in their twenties or thirties, but early and consistent saving is the absolute best way to ensure that you will have enough income to actually leave the work force when the time comes.
Sadly, it’s a reality in the U.S. right now that many older folks who should be considering retirement now are finding that they don’t have the funds to do so because they never saved adequately for this stage of their lives.
They are facing the grim prospect of outright poverty and/or a seriously curtailed lifestyle, or working well into their elderly years.
You want to avoid their mistake by starting your retirement savings plan early.
A Word About Pensions
Let me say this about pensions. If you happen to be lucky enough to have an employer that offers one, that’s wonderful, and you’re one of the lucky few to still have that benefit.
However, pensions can only be tapped into once you reach a certain age and have worked X number of years. Aside from the fact that you might not want to wait that long to leave the job, it’s not a good idea to put all your retirement eggs in one basket.
It’s simply a wise strategy to save for retirement on your own.
A case in point is my husband who had a pretty nice pension plan with his company, in addition to a 401K plan.
But the pension’s value was seriously curtailed when he was laid off way before full retirement age. The pay-out it now offers is about 1/3 of what it would have been and will not be anywhere near enough to live off, even when augmented with Social Security.
We didn’t expect him to be laid off when he started the job in his twenties. But life has a way of sometimes throwing curveballs and shortening work careers unexpectedly. In those cases, you’re often just plumb out of luck if you haven’t planned for such an occurrence.
Let me say this about pensions. If you happen to be lucky enough to have an employer that offers one, that’s wonderful, and you’re one of the lucky few to still have that benefit.
However, pensions can only be tapped into once you reach a certain age and have worked X number of years. Aside from the fact that you might not want to wait that long to leave the job, it’s not a good idea to put all your retirement eggs in one basket.
It’s simply a wise strategy to save for retirement on your own.
A case in point is my husband who had a pretty nice pension plan with his company, in addition to a 401K plan.
But the pension’s value was seriously curtailed when he was laid off way before full retirement age. The pay-out it now offers is about 1/3 of what it would have been and will not be anywhere near enough to live off, even when augmented with Social Security.
We didn’t expect him to be laid off when he started the job in his twenties. But life has a way of sometimes throwing curveballs and shortening work careers unexpectedly. In those cases, you’re often just plumb out of luck if you haven’t planned for such an occurrence.
Be Proactive in Saving for Retirement or Financial Freedom
The takeaway is that you should be proactive about your retirement – or financial freedom - savings. And the best time to start is immediately, if you haven’t already.
To begin with, you should be maxing out your contributions to your employer’s 401K plan, if they offer one, particularly if they offer free money in the form of matching funds. Do not throw away money by skipping this.
But beyond that, set a savings goal for your “financial freedom” nest egg that will give you the option – at any time, and not just after the “typical” retirement age of 65 – to walk away from a job entirely, or to be able to pick and choose the kind of job you’d like to do
Continue to save and add to these savings and investment funds every year so that the pot is always growing.
The takeaway is that you should be proactive about your retirement – or financial freedom - savings. And the best time to start is immediately, if you haven’t already.
To begin with, you should be maxing out your contributions to your employer’s 401K plan, if they offer one, particularly if they offer free money in the form of matching funds. Do not throw away money by skipping this.
But beyond that, set a savings goal for your “financial freedom” nest egg that will give you the option – at any time, and not just after the “typical” retirement age of 65 – to walk away from a job entirely, or to be able to pick and choose the kind of job you’d like to do
Continue to save and add to these savings and investment funds every year so that the pot is always growing.
Make Savings A Top Priority
Arriving at that “freedom” dollar amount is not something that will happen overnight, unless you come into an unexpected windfall or inheritance, or win the lottery (we all can wish, right?).
But it doesn’t have to take anywhere near 4-5 decades, if you have the good fortune to have steady employment, and if you develop good habits of thrift and economy.
The bottom line is that savings MUST be a major priority in your financial planning. I cannot stress that enough. In fact, it should be the first thing you increase when you get a raise – way before any increase in lifestyle costs.
So before you go about spending more when you get a raise or earn extra income, make sure your savings plan is on track.
Once all that is in place, by all means go ahead and indulge in some fun stuff. Just do it judiciously and try not to develop expensive or lavish tastes. It’s never easy to scale back down again once we’ve made things a “necessity” in our lives.
Hold onto that thought and keep your “needs” simple. That attitude, combined with regular savings, will ensure that you’ll be fine.
Arriving at that “freedom” dollar amount is not something that will happen overnight, unless you come into an unexpected windfall or inheritance, or win the lottery (we all can wish, right?).
But it doesn’t have to take anywhere near 4-5 decades, if you have the good fortune to have steady employment, and if you develop good habits of thrift and economy.
The bottom line is that savings MUST be a major priority in your financial planning. I cannot stress that enough. In fact, it should be the first thing you increase when you get a raise – way before any increase in lifestyle costs.
So before you go about spending more when you get a raise or earn extra income, make sure your savings plan is on track.
Once all that is in place, by all means go ahead and indulge in some fun stuff. Just do it judiciously and try not to develop expensive or lavish tastes. It’s never easy to scale back down again once we’ve made things a “necessity” in our lives.
Hold onto that thought and keep your “needs” simple. That attitude, combined with regular savings, will ensure that you’ll be fine.
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