The 4th of July is about more than fireworks and lighting up the grill -- it's a time to reflect on the meaning of independence. For many Americans, the stress of debt and other financial responsibilities can feel like a loss of freedom. Fortunately, there are steps you can take to prioritize these competing obligations to put yourself in control of your financial future.
The following savings fundamentals are ranked steps to help you know what to tackle first and what can wait a little longer. While everyone's financial situation is unique, this ordered list makes sense for many savers who want to start on the path toward declaring financial independence.
1) Celebrate the 401(k) employer match. If your 401(k) plan offers a matching contribution, be sure to save at least enough to take full advantage of it. This can mean a real boost to your savings. For example, someone earning $50,000 whose company offers a 50 percent match up to 6 percent of pay would receive a $1,500 company match on top of the $3,000 he or she contributed to the plan. Saving in a 401(k) can also offer tax benefits. In a traditional 401(k), contributions are deducted from your pre-tax income, and the money has the potential to grow tax-deferred until you begin making withdrawals at retirement.
2) Free yourself from credit card debt. There are few feelings more liberating than paying off credit card and other high-interest, nondeductible debt. It will be much easier for you to meet your financial goals when you can put your money towards your savings rather than towards monthly interest payments. Some ways to do this include:
- Curtailing your use of credit cards to help slow the growth of your debt.
- Making minimum payments on all balances, while paying more than the minimum on the balance with the highest interest rate. When that debt is paid, up your payments on the balance with next highest rate.
- Trying to negotiate a lower interest rate that still preserves your credit rating.
4) Max out tax-deferred retirement accounts.
Once you've tackled steps 1-3, go back to saving for retirement. This year, you can save up to $17,500 in your 401(k), plus another $5,500 in catch-up contributions if you're 50 or older. For an IRA, the limits are $5,500 plus another $1,000 if you're 50 or older. Investing in a tax-deferred account like a 401(k) or an IRA can be especially beneficial to your financial wellbeing because when any earnings compound free of taxes, even small contributions can grow into significant sums over time. A recent survey found that the majority of respondents accept responsibility for financing their own retirement and are relying primarily on their 401(k) to get them there,* so you'll be in good company.
Once you've taken these four critical steps, you'll be able to tackle other money matters, like saving for a child's education or a down payment on a home, paying down your mortgage, or investing in the stock market. Being proactive about your finances is one of the best ways to take ownership of your circumstances and create a brighter tomorrow. Happy Independence Day!
*Charles Schwab in conjunction with Koski Research, 401(k) Participant Survey, 2013.
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