Planning for Retirement
After you have the emergency fund built, you plan to fund three large expenses…your future income (also known as the retirement fund), your kids’ education, and paying off your home. This requires a very disciplined approach to handling your income. In fact, one of my financial mentors, Ron Blue at Kingdom Advisors, says there are only four things you can do with your money: live, give, owe, grow. And how you prioritize these four things will determine how well you manage your finances and your life, and thus your financial freedom and peace.
As a person of faith, I believe the first thing in your spending plan should be giving back to God what is His, this is the first fruits of what I have earned from how He has gifted me with talents and abilities. So 10% of income goes to my local church first.
Next I fund my future income, my retirement plan with 15% of my current income. The magic of compound growth (making financial gains on your financial gains) makes this a no-brainer, you must do this no matter what. You cannot expect the government (through social security and Medicare) or your family to take care of you in retirement.
By the way, did you know that when you retire, you stop working and your paycheck stops too? Thinking about your retirement plan as your future income should help motivate you to put this money away. You will want to enjoy your much freer time more than you do today. You can also anticipate that your future expenses will be much higher than they are today. So you are funding your future lifestyle, or future income, not this nebulous thing called a retirement plan. Your social security check is likely to fund less than 50% of that future lifestyle, and in all likelihood only 30-40% of your living expenses. So now is the time for current income to fuel future income.
Next, if you have determined to help your kids with their post-secondary education expenses, open an ESA (education savings account) or a 529 plan. Do some research on this as every state and financial institution is different and you want as much flexibility as possible should your kids decide not to go to college. Plan to put about 5% of your income in these plans, and start early to take advantage of compound interest.
Lastly is probably the largest expense or investment you will ever make…your home. In your budget or spending plan, the monthly expenses for your home should be no more than 25% of your take home pay, which is likely 2-2.5 times your annual gross salary. Overspending on a home will impact you for years to come. Do not become house poor (all of your money goes to your house payment, leaving no margin for anything else).
If you don’t own a home, trying putting this amount away until you have a 20% downpayment saved. Then purchase a home that will create a mortgage payment of the same amount, including taxes and insurance. Hopefully, this is in a 15-year fixed rate mortgage so that it can be paid off before the kids head to college.
If you already own a home, with a 30-year mortgage, the goal is to pay off the mortgage early. Assuming the mortgage is not more than 25% of your take-home pay, start making extra principal payments every month to avoid costly interest on your mortgage. Not having a mortgage on your home, not having a first-of-the-month payment due every month, provides a great sense of financial freedom and peace.
The smart money, yes pun intended, is learning to live on 45-50% of what you make, at least make that a target or goal. If you analyze your current LGOG pie chart, you can discover the gaps and make a plan to get to the ideal target.
Now, none of this is easy. It will require discipline, perseverance, and focus. You will need to learn to practice delayed gratification when it comes to spending. We all have this tendency to turn wants into needs thinking that buying things will make us happy. You know, “oh, that’s a nice [house, car, cell phone, tv, etc.], I want that, then, I need that, then I must have it,” and we make the purchase and then we repeat that process with the next nice thing. Our friend Carl Richards at BehaviorGap.com likens it to this graphic. And this is exactly the behavior we must defeat if we are to create financial margin, financial freedom, and financial peace.