Part of keeping any household running smoothly is ensuring that the family/household finances are in order. I’ve written before about budgets and frugality. Tracking spending, saving money, and being frugal are great ways to start to get a handle on personal finance. In fact, the primary tenet of good personal finance is “spend less than you earn.” Spending less than you earn is the only way to effectively build wealth and financial freedom for yourself and your family.
In the past year, my husband and I have made huge strides in this area of our life. We discovered a new level of financial discipline when we decided to buy a house. Since then, we’ve continued following a budget, saving money, paying off debt, and looking for ways to reduce our dependence on 100% of our current income.
I’m happy (and relived!) to report that we are now completely consumer-debt free, meaning no more credit card and car loan balances. We also have a comfortable emergency fund, thanks in large part to the first-time home buyer tax credit.
And, while that is all well and good, it is now time for us to really hunker down and take care of some of the more complicated aspects of personal finance: investing and retirement savings. That said, here’s my list of goals for the year that we need to accomplish to truly get our financial house in good order.
Goal #1: Save 15% of gross (before taxes) income in retirement accounts. I recently forced myself to run some hard numbers and look at reality in black and white terms. We’re currently saving more than 15% of our income for various reasons, however we’re only saving 9% of our income in retirement accounts. This has to change.
The best rule of thumb I have gotten is to determine your goal dollar amount by multiplying your total income (before taxes) by 0.15 (15%) and then meet that dollar goal in three ways:
- Contribute to a 401(k) or 403(b) to the extent the contribution will be matched in whole or on part by your employer. So, if your employer will match at 50% your contributions up to 5% of your income (for example) contribute 5% of your income to your 401(k) and take the match.
- Next, max out an IRA, either a Roth or a regular IRA. As of the writing of this post, each individual can put up to a maximum of $5,000 in either a Roth or a regular IRA per year. For a two-income household, that’s $5,000 for each wage earner. You might be able to take a tax deduction on the money you put in a regular IRA. You pay taxes when you withdraw the funds in retirement. You can’t take a deduction on the money you put in a Roth IRA, but you withdraw from a Roth tax-free in retirement. There are complicated details and income limitations for IRAs. Here is a good primer.
- If the total from step 1 + the total from step 2 still does not add up to 15% of gross household income, then contribute the rest to the 401(k) in addition to the amount you determined for step 1.
When all is said and done, step 1 + step 2 + step 3 should = 15% of your before-tax household income. You shouldn’t count the employer-match towards the 15% until you are 100% vested in the money. Since both my husband and I work full time, this will take some number crunching to figure out, especially because our respective employers offer very different retirement matches and benefits.
Goal #2: Open and fund an accumulation account. An accumulation account is a savings account that has enough money to cover expected expenses as they arise throughout the year. By putting a little aside each month, the goal is to accumulate enough to cover annual and routine expenses such as:
- Auto, home, and life insurance
- Auto maintenance (or replacement)
- Pet care (emergencies and routine)
- Home maintenance, emergencies, and furnishings
- Christmas and holiday gifts and expenses
- Charitable giving
These are just a few examples. Each family may have more or fewer categories based on their lifestyle and needs. I plan to open a special savings account for this purpose and track the amounts we have designated for each category in an excel spreadsheet. I’ve also heard that ING has great online savings accounts with sub-account categories, but I don’t personally have experience with ING. Here is a great post about these types of accounts.
Goal #3: Ensure our insurance and will are in order. This feels like such a depressing, grown-up thing to have to think about. But this year, one of our goals is to determine exactly how much life (and other types) of insurance we need and make it happen. Fortunately we have a close friend in the insurance industry who we can talk to and get straight advice from. We also plan to write a simple will and we may use an online service for that.
What about you? What are your current financial goals? Don’t be shy… you can always post comments under a pseudonym!
Just a note: please remember I am not a professional-finance-anything. This is my plan and what works for us, but should not be considered pro advice by any means!