You’re Good to Go
Once you’ve built your emergency fund, take a minute to congratulate yourself. Having a buffer of three to six months’ worth of living expenses safely tucked away is a huge relief — and a significant accomplishment.
But what’s next? Without a plan for the money you were putting away each month, it would be easy to embrace lifestyle creep. You likely have at least a few financial goals, so why not reallocate that cash toward new achievements? Here’s what to do now that you’re prepared for the unexpected.
Raise Your Credit Score
Once you have your emergency fund in place, focus on improving your credit score. A strong score makes it easier to borrow money and make big buys like houses and cars at affordable interest rates (the same goes for renting). And your score might even be checked by utility companies and potential employers.
If you have consumer debt, like an outstanding credit card balance, paying it off can go a long way toward raising your score. And while boosting your credit score big-time can take months or years, smaller increases can happen in about a month. One way to crank it up fast? Make sure you’re using only about 30 percent of the credit available to you. You can also ask your credit-card company to increase your available credit — just don’t start charging more, or you’ll defeat the purpose.
And while you’re at it, be sure that you’re doing the right things to keep your credit score high. “Always make payments on time, pay more than the minimum, and don’t close out old credit cards. Lenders want to see long, good history,” Michael Clark, CFP, financial advisor at Keiron Partners, says.
Bulk Up Your Retirement
If you haven’t yet made it a priority to prepare for retirement, start saving consistently now. Maximize your annual contribution to your 401(k) or other employer-sponsored retirement plan (especially if your employer offers a match — take that free money). If your company doesn’t offer a plan or you’re a freelancer, you have plenty of options. Take advantage of them.
Skeptical that you need to save for retirement? It’s time to change your mind. Social Security won’t be enough to provide for everyone who needs it, and it’s “unlikely that you can work forever,” says Ryan Huard, vice president of Sentinel Benefits & Financial Group.
Try to sock away 10 to 15 percent of your income into your retirement account, Clark says. You may need to trim your spending to get there, so do a financial check-in and see where you’re overspending — you might be able to easily chop your monthly bills or grocery tab.
Save for a Home
If owning a house is one of your goals, do your homework first to figure out how much you can afford, says Peter Huminski, president and wealth advisor at Thorium Wealth Management. “As a general rule, you should not have more than a 36 percent debt-to-income ratio, including your home mortgage payment,” he says.
Here’s how to determine your debt-to-income ratio: Add up all your monthly debt payments and divide them by your pretax monthly income. For example, if you earn $50,000 a year — or about $4,166 a month — you should keep all your debt payments under $1,500 a month. So if you’re already paying $100 a month on a student loan and $300 on a car loan, you’ll want your house payment to be $1,100 or less.
Once you know what you can afford, you can start saving for a down payment. Huard recommends saving for at least a 20 percent down payment, which is usually the minimum for avoiding extra fees. (However, if 20 percent seems out of reach, you still have options.)
Focus on Your Children’s Education
Start saving for your kids’ education by opening 529 college savings accounts. “Every state offers them, and they are a great way to set up a systematic investment every week or month that goes toward the goal,” Huminski says.
While funding a college education for a child or grandchild is a noble goal, your retirement should be your first priority, Huard says. “This is an area where you need to be a little selfish. Never put off saving for your retirement to fund a child’s education,” he says. “There are all kinds of ways to fund college — work-study, scholarships, grants, and student loans. When it comes to retirement, there are no loans or grants. You either have enough saved or you don’t.”
Not only can it compromise your retirement savings, but over-funding for college can also hurt your child’s ability to receive need-based financial aid, Huard adds. “The best owner of college savings dollars are grandparents,” he says. “A grandparent can own a 529 college savings plan, while the grandchild is the beneficiary, and when it comes to applying for financial aid, those assets aren’t counted toward the expected family contribution.”
Grow Your Wealth
While you may be counting on getting a raise each year to increase your income, the best way to build wealth is to invest the money you’re making now. To wit: The top 1 percent of earners in the U.S. receive more than one-third of their income from investments, according to figures from the Congressional Budget Office. But you definitely don’t have to be a 1-percenter get in on that action and grow your wealth over time.
Investing some of your income is better than just stashing it all in savings accounts, where interest rates are historically low. To start investing, consider a mutual fund or exchange traded fund (ETF), since they usually have lower fees as well as professional managers to keep them diversified. Do your research to make sure you understand how your money is being invested, and don’t be afraid to ask a financial advisor questions.
Work toward investing 10 percent of your income, recommends Bill Van Sant, CFP, senior vice president and managing director of Univest Investments. And commit to investing for the long term rather than constantly making changes to your account or panicking when the market drops. If you’re in it for the long haul, you will see results, Van Sant says.