“Tell me and I forget, teach me and I remember, involve me
and I learn.” Benjamin Franklin
Last month’s introductory column identified the goal to
involve readers by providing actionable items to assist them with gaining
financial security. By reducing the complexities of financial choices, readers
will learn to make confident short and long-term decisions.
The new year is often a time for reflection and assessing
your finances is as healthy as the commitment to exercise more often. While
managing finances is stressful in most years, it is especially so today as the
world is reeling from a global health crisis. However, please resist the urge
to ignore your finances.
The action identified in December was the most important
first step to achieving financial security. We recommended that readers simply
track their recurring monthly income and expenses. This small first step can be
extended later to quarterly budgets and then ultimately to an annual analysis.
The next step is to identify where excess monies should be
placed from a practical and tactical standpoint. Consider establishing the
following “buckets” and determine a dollar goal for each:
- Emergency savings — Establish a savings
account, separate from your checking account, that totals three to six months’
salary. A simple step is to contact your bank or brokerage firm to establish
the account and transfer the whole amount today, or set-up an automatic deposit
each month or each pay period, until your goal is achieved. The key to
protecting you from accessing these emergency savings is to make it
functionally difficult to access.
- Debt repayment — Because the interest
paid on savings accounts is currently at zero, the next actionable step to gain
financial security is to use the monthly excess you have identified to pay down
debt.
- Retirement Savings — Once the emergency
savings and debt repayment plans are established, excess monies should be
allocated each pay period into your employer-sponsored retirement plan, if one
is offered.
Many companies offer retirement plans that allow employees
to withhold money directly from their paychecks that is placed into accounts
that grow tax-free. Such plans include 403(b) and 401(k)s. These companies may
also provide contributions based upon your salary on a percentage basis and
many will match your contribution up to a defined amount.
The terms of your employer’s plan are available from the
company or recordkeeping vendor in the form of a summary plan description. The
actionable item for January is to evaluate what you are currently contributing
to the plan and whether or not you are receiving the maximum match offered by
your employer.
If you do not know the answers, this information should be
available upon request to the company or online at the recordkeeper. If you do
not know how to access it, ask!
As a final note, Congress recently passed a relief bill that
will be hitting the bank account of many readers soon. Take this deposit and
use it opportunistically to act on the suggestions outlined above.
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original article.