Retirement Planning: Let the Journey Begin

The sage advice that a journey of a thousand miles begins with a single step, also applies to saving for your retirement. It’s up to you to take that first step. If you wait until you have “enough” money to begin saving, you may never start at all. Instead, focus on the first step. Then, you can begin transforming that thousand-mile journey to retirement into smaller, more manageable goals.

In order to start saving, you must spend less than you earn. If you feel that this is easier said than done, you’re not alone. But, it’s time to manage your personal finances and begin saving for your future. The concepts are simple: Monitor where your money actually goes and plan ways to spend it carefully. In other words, prepare a budget.

If the mere thought of a budget makes you feel deprived, think of it as a personal spending plan instead. Rather than focusing on what you should not spend, a personal spending plan can help you redirect the money you do spend.

The first rule of saving is to pay yourself first. Even if you start small, with patience and persistence, you can find ways to reallocate your money over time and watch your savings grow.

Not sure how to get started? Consider the following steps:

1. Track your expenses for one month. Record your daily expenses for at least one month. Categorize them as fixed, variable, or discretionary. Fixed expenses include those for which the cost remains the same every month, such as your mortgage or rent, car payment, and insurance premiums. Variable expenses are those you pay on a regular basis, but for which the amounts vary, such as food, utilities, childcare, travel expenses, and credit card debt. Discretionary expenses are those you could forgo if necessary, such as dining out, vacations, and entertainment. After tracking your expenses for one month, you can begin to see exactly where your cash is going.

2. Calculate each expense as a percentage of your income. This exercise helps identify how each expense relates to your total income. For instance, if you lease a new vehicle for $320 per month and your monthly income is $3,200, you are spending 10% of your income on your vehicle. Aim to trim these percentages wherever possible. You may be able to make large gains in savings by reducing many expenses by small percentages.

3. Prioritize your expenses. Rank each expense as “important,” “moderately important,” or “unimportant.” Carefully scrutinize each item, starting with the unimportant ones. Eliminate those items you can do without. You may have the most leeway when it comes to discretionary expenses. The savings you generate in this area alone may be enough to begin a modest savings program. Then, look for opportunities to trim expenses that fall into the moderately important and important categories. For instance, you may be able to find a less expensive Internet provider if you shop around. Or, perhaps you could find a less expensive or more fuel-efficient vehicle when your auto lease is up.

4. Pay yourself first. Here’s the key to success—once you’ve explored all potential savings, write yourself a check for the amount you saved and “pay yourself first.” How you manage your money depends on how much you have and your future goals. As you plan for retirement, consider contributing on a regular basis to an Individual Retirement Account (IRA) or employer-sponsored 401(k) plan. If you’re also saving to send a child to college, you might develop an education funding plan.

By paying yourself first, along with your other expenses, you’ll be a lot more successful at saving money for your future. As you see your funds accumulate, you’ll be glad you took that first step. So, what are you waiting for? Your retirement will be here before you know it, so let the journey begin.