If you’ve paid off your high-interest debt and begun contributing to an emergency fund, congratulations! Now it’s time to focus on your other financial goals. That means taking into consideration the specifics of your situation and making a plan that’s right for you. To better understand how to do this, let’s look at how others have started their own savings plans and made adjustments to them as their circumstances change.
Jason joined the armed services when he was 19 years old, about the time he got his first credit card. Even though Jason has always considered himself to be careful with his money, in a couple of years’ time, he has run up a balance of $2000 on his card. Not that he has made frivolous purchases. Most often, he uses his card when he is short of cash at the end of the month, or when a car repair or other unexpected expense pops up. He always pays the minimum due on time. Even so, his balance never seems to go down that much and, unfortunately, periodic expenses force him to add new debt to his balance. Also, he is trying to do the right thing by putting money into a Savings Account to save up for a trip stateside to see family and friends a year and a half from now. Though at the rate he’s going, he doesn’t see how he’ll save enough money to go on his trip without going further into debt.
In this scenario, Jason is making several common mistakes. First, even though he doesn’t spend his money frivolously, he hasn’t sat down and made a budget. Doing so might reveal a number of areas where he could spend less. Also, he is paying only the minimum on his credit card balance each month. At that rate, it could take him years to pay it off. Jason is trying to put money aside for his upcoming trip, which is admirable, but because the interest on his credit card is so much higher than what he can make in interest from the money in his savings account, he would be better off waiting to contribute to it until after he has paid off his credit card balance.Let’s assume that after working out a budget and sticking to it, Jason has $200 that he can put toward his credit card debt every month. In about a year’s time, he has paid off his balance. Now free of debt, for the next six months, he puts the $200 a month into his savings account. By the time of his trip, he has saved over $1200.
Finally, assuming Jason’s trip costs $1200 and he returns home with no money left. Immediately, he should resume putting the $200 a month into his savings account. Even though he is debt-free, as long as he has no money set aside to cover emergencies or unexpected expenses, he’s in danger of falling back into debt. Once he has saved $1000, he might want to move it into a CD where he can earn a higher return than he can in a savings account.
Jason is a young man and, at this point in his life, retirement may seem a distant and abstract prospect. Even so, it’s not too early for him to start planning and saving for retirement. By beginning now, rather than waiting, he can add considerably to the amount he’ll have to retire on. Once he has a fund he can draw on in emergencies — even as little as $500 — he should consider setting up regular automatic contributions to a retirement account, such as the Thrift Savings Plan.
Between his officer’s pay and her civilian position as an office manager on base, Tom and Maria have been getting along without too many money worries. They have a little set aside for emergencies and put most of the money they save each month into his Thrift Savings Plan. However, they just got news that changes everything: they’re going to have a baby. Suddenly they have short-, medium-, and long-term goals they didn’t have before. Now their short-term goals include the expenses that can come with a newborn. For one, the small car they’ve been driving may not accommodate their new family member. They could take out a loan for the full cost of a new car, but they prefer to have a down payment. Also, Tom and Maria are aware that the cost of college tuition has been rising twice as fast as the rate of inflation overall and that paying for college is one of the major challenges that families face. To meet this long-term goal, they start contributing to a 529 college savings fund designed specifically for that purpose. While their lifestyle has been far from lavish, they realize that with the new expenses headed their way, they need to tighten their belts. They work out a new, more frugal budget that helps them accommodate these new commitments without giving up on important long-term goals, such as a comfortable retirement in their own home.
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