This was originally published on Monday, February 9, 2016, in the Pacific Daily News. Click here to subscribe to the PDN.
Retirement, whether it is near or far, should be a priority for all of us. Most people believe that you have to make a lot of money to save for retirement. You don’t have to make a million dollars to save a million dollars. What you do need are habits that create successful retirement savings.
Save early. By starting early you gain some advantages. The money you save grows through compound interest. Compound interest multiplies your savings as time passes. The longer you grow your investment the more interest it earns. By starting early you also learn more about the habit of saving.
If you did not start saving at an early age, you are not doomed. Start as soon as you can. You may have to put a little more aside but having a retirement fund is certainly better than not having one at all.
Minimize debt. This can be the hardest habit to develop. Sometimes we can’t avoid being in debt. The money could be used to purchase a car, to pay for college or to buy a home. But there are some debts that you can avoid such as credit card debt. For everyday purchases use cash not your credit card. If you do use your credit card, pay it off as soon as possible. Pay more than the minimum amount that the credit card company asks for. An extra $20 to $50 can make a huge difference when it comes to paying off a credit card debt.
Take a look at your debt-to-income ratio. Add up all your monthly debt payments and divide it by how much income you bring home in a month. Target a maximum debt to income ratio of 35 percent.
Mortgage. Buying a home is probably going to be the largest purchase you will ever make. By putting down a larger down payment than what is required you will reduce the amount you owe.
There is some debate about going into retirement with a mortgage versus no mortgage. If you try to pay off your mortgage early, you are diverting some of the money you can be investing into your retirement account. The more you put into the account, the more compound interest you will earn. But if you pay off your mortgage before you retire, you will not have to make that monthly payment and that could ease your mind when you are living on a fixed income. Do the math in terms of the investment return of your retirement fund versus the mortgage cost then make a decision when it is best to pay off your mortgage.
Automatic deduction. Make the contributions to your retirement fund automatically. Have the payments come directly out of your paycheck. If you do not have to touch the money to make the payments you will not be enticed to use it elsewhere.
Take advantage of your retirement fund. If possible contribute the maximum amount to your retirement fund. This is especially true for those who are starting a little later in life. Many people think that they can’t afford the maximum payment. If you have the amount automatically deducted from your account you really won’t miss it. You will learn to live on a little less.
If you honestly can’t make the maximum contribution, at least contribute the maximum your employer will match. Your employer’s contribution is free money that you should not be passing up.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.