The need to get retirement ready may seem like something to worry about once the wrinkles set in, not when your face barely needs a touch of make up to shine.
Yet what you do now determines how much money you will have in retirement.
Before you can start planning for the long term, you must take an honest look at your present financial situation. What needs improving?
1. Reduce your credit card debt
Do you have credit card debt and little or no assets, equity or savings?
Even a small amount of debt can snowball over time and ruin your chances of saving enough for a self-funded retirement.
You must pay off, or at least reduce, your credit card debt before you start investing. It may even be prudent to refinance your debt by increasing your home loan.
By doing this, you can reduce the credit card interest you pay by two thirds. However, you would also need to rein in your spending.
Otherwise, you could fall into a vicious cycle of refinancing your home loan every few years to pay off your continuing debt.
2. Finalise the family home
If you are renovating, building, selling or upgrading the family home, this must be finalised before you commit to a long-term financial plan.
You don’t want to take on a hastened investment that ends up costing you dearly because you were too preoccupied with small to medium-sized goals.
3. Manage your budget
At some point in the future, you will need to pay off your investment debts. If you currently struggle to budget and save, chances are you’ll struggle in the future, too.
Failing to live within your means places long-term strategies and investments in jeopardy.
To invest and build your assets, you must first work out your expenses, commit yourself to a realistic budget and regularly save money from your disposable after-tax income.
4. Manage your bank accounts
Effective banking practices allow you to control your household expenses and manage your financial goals. For example:
- Have no more than one credit card or debit card. Use this card to pay all the household expenses. Ensure the limit is no more than $2000.
- If you have a spouse or partner, ensure both incomes are paid into your home loan/offset account.
- Create separate accounts for holiday savings, household budget, education and investment/property. Set up monthly or fortnightly direct debit payments into each account.
- The investment/property account can be where any rental income goes in and property expenses go out. If you don’t have a property, you can use this account to save for your own home, investment property, shares or managed fund.
- The education fund can be a savings account or another offset account split against the home loan (where the balance offsets the home mortgage and the interest is calculated on the net amount). This allows you to save for your children’s education while reducing the interest on your home loan. Use money in this account for school fees, uniforms and books, and save for future private school and/or university fees.
5. Your age and retirement goals
If you don’t allow yourself ample time to grow your wealth and assets, you may need to adjust your lifestyle at retirement.
People who start planning in their 40s have a 20-year horizon to work with.
This gives them a much better chance of achieving their retirement goals than someone who is in their 50s with limited assets.
However, when there is a will, there is a way. It starts with an honest money conversation.
Once you have improved your current financial situation, you can start looking at ways to invest your money.