Many recent graduates are moving into the work force. Life transitions often involve a lot of decisions – housing? car? benefits? budget? This is also a good time to consider your financial goals. Different goals have different time horizons. Some are short term—such as establishing an emergency fund—and some are long term, like retirement. Tackling all your savings goals at once is unrealistic, so you should prioritize.
The most immediate savings goal is your emergency fund. Experts recommend that you have an emergency fund sufficient to cover six months living expenses. Assets in the emergency fund should be very liquid such as cash in a savings account or in a money market fund. If you are new to the workforce, it may take time to build up an adequate reserve. The easiest way is to transfer a portion of your paycheck every pay period directly into an account.
You may need a bigger emergency fund in some circumstances. You may face hurdles when looking for a new job, such as geographic restrictions or the need for flexibility in terms of travel or work hours. If you have health issues or a dependent with special needs, you will need a larger emergency fund. If you dip into your emergency fund, replenish it as soon as possible.
Saving enough for retirement is the biggest concern for many of us. You will likely need multiple sources of savings to fund your retirement: The primary sources of retirement funds come from 401(k)s, 403(b)s, and IRAs. Social Security is also a source of retirement funds. You can go to ssa.gov/estimator to estimate your future Social Security benefits. Social Security payments will be greater if you delay collecting until age 70, because the Social Security Administration bases its computations on old mortality tables that project shorter life expectancies. Another source of retirement funds is personal savings.
Retirement calculators and savings guidelines can provide you with an estimate of what you need to save. For income needs during retirement, factor in 70–85 percent of your preretirement salary. It is challenging to estimate your future salary, so try different scenarios. I prefer the multiple of income method. Experts suggest striving for a multiple from eight to fifteen times your salary at age 65. If you plan to retire before age 65, or if you have a high income and a high standard of living, aim for the upper end of the range.
You need to chart progress over time. The multiple of income method makes this easy. Compare your current retirement savings balance to your current salary to assess your progress. Computing the multiple based on your current salary will help you determine whether or not you need to ramp up savings.
Unless you are facing a dire emergency, do not borrow from your retirement account. If you do so, you will miss the growth opportunity for the money that you borrowed. Paying yourself back could take longer than expected.
Your intermediate savings goals depend on lifestyle choices, and they should come after establishing an emergency fund and making regular contributions toward your retirement savings. For intermediate-term needs, focus on one need or goal at a time. To work toward to that goal, some people save a fixed percentage of their income, such as 10 percent or 15 percent. This strategy is appealing because it is easy to stick with and simple to follow. A fixed percentage gives you the flexibility to save more if your income goes up and save less in a down year.
Our financial lives can feel overwhelming at times. Articulate your objectives, simplify your plans, and chart your progress. All will contribute to your success achieving your goals.
