As I wonder about the state of our economy, the recent theatrical swings of the market, and the ongoing housing dilemma, I am also thinking about what can we do to hedge ourselves financially, especially when we feel like we are stuck or trapped in our current situations.
The answer is we have to go back to the basics.We have to strap our belts and learn to trim the fat on our spending habits.
I have to confess, I love nice things. I swear that I could walk into a store, and the one item I like will always be one of the most expensive things in the store.
I realized that I need to focus on living within a specific amount a month, however. It is not always easy because life happens and incidents come up that are out of our control. We might be stuck with an expensive car repair bill or have to fix the air conditioner because it has stopped working. (I just dealt with that one myself.)
These life incidents tell me how important it is to have at least $5,000 available for incidentals. You can jump-start this by using your tax refund as a basis. Then, you can build from there.
If you are starting from scratch, then it takes $208 per month for two years to build $5,000 in savings. Have it come out automatically into an account you may not use often. You don’t want it to become an extension of your checking account. It is your emergency/rainy day fund. Use only in a major crisis.
We need to develop a habit early to set our 401K, TSP, 457 and 403B savings on automatic. When I started working, a colleague strongly encouraged me to contribute to my retirement savings. I listened and to this day appreciate him caring enough to give me the advice.
I began by first finding out how much of a match I would receive from my company or organization. Then I set up that percentage to come out of my paycheck. Each time I received an increase from a raise or cost of living increase, I increased the percentage of my payroll deduction.
The goal here is to max out the amount you can contribute to your retirement. Which this year, 2011, is $16,500 according to the Internal Revenue Service (IRS). (The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains at $16,500.)
Contributions to a Roth or Traditional IRA are $5,000. For those who are over age 50, there are catch up provisions in place so you can put in even more towards your retirement savings.
If you are over the age of 50, you can put in an additional $5,500 into your 401K, TSP, 457 or 403Bs and an extra $1,000 in an IRA. These additional provisions were put in place to help and encourage us to save or make up for a lack of savings that may not have occurred earlier in our lives. We need to begin to take advantage of this.
My point in all of this is to encourage you to start somewhere, break the sum down into manageable amounts that you can financially handle, and to put your efforts on auto-pilot so you are not thinking about this every pay day.