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Getting Fiscally Fit
If you were born during the 1990’s know that achieving fiscal fitness early pays dividends down the road. You might consider starting today.
The elements of a sound fiscal fitness plan include:
- Maintaining a budget
- Minimizing debt
- Establishing an emergency fund, and
- Contributing to retirement plans
Maintaining a budget means itemizing expenses, which allows individuals to track how much money is taken in during a given period and discern the best way to divide it among various categories. Moreover, a budget provides the chance to see where changes can be made. A reduction in expenses means an opportunity to increase savings and investment contributions.
We all need to minimize and manage debt. While some debt (e.g. car loans) is impossible to avoid for most, it can be minimized by seeking the lowest interest rates possible when a loan is required. The most significant ways to manage debt is to pay off loans as quickly as possible, limiting interest paid, and to avoid carrying balances on credit cards. The interest paid on debt works against the goal of ‘fiscal fitness.’
Establishing an emergency fund is the key to avoiding carrying credit card balances and dipping into monies intended for savings and investments. A cash account set up as an emergency fund is used only to fill financial gaps or meet unexpected expenses. How much should be maintained in an emergency fund? Some suggest living expenses for a given period (e.g. one year), while others suggest income for a given period (e.g. three or six months). In most cases, marital status (single people are reliant on one income); the number of children, and the level of job security are primary factors for consideration. The amount will vary for individuals as the factors that impact lives will be different. However, three months living expenses should be considered the minimum.
The final element is to contribute to retirement plans. Most of us will be reliant on a defined contribution plan and an individual retirement savings plan to secure their financial future. With defined contribution plans, the employee and/or the employer contribute money to the employee’s account.
In 2013, the contribution limit is $17,500. The traditional 401(k) is the most popular type of defined contribution plan. There are two major types of individual retirement savings plans, the traditional Individual Retirement Account (IRA) and the Roth IRA. In 2013, the limit for both is $5,500. With a traditional IRA, contributions are taken off of yearly income, which has the effect of lowering the tax liability for that year. However, once funds in an IRA are withdrawn, they are subject to standard income taxes. Unlike traditional IRAs, Roth IRAs are not tax-deductible. However, the contributions to a Roth IRA can be withdrawn at any time without being subject to taxes or a penalty.
So for the brothers (and sisters) under forty and have a few decades to retirement age, time is on your side. Being proactive in younger years can really serve you from being reactive later in life.
James Molet is the author of RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit available on Amazon.com. Mr. Molet shares insightful financial information for Healthyblackmen.org readers in a 3-part series. This article submitted for those forty and younger.