Many Americans today are on a see-saw when it comes to their finances. While they earn enough to afford a reasonable lifestyle and raise a family, they feel as though their financial security remains uncertain. With competing financial commitments, there never seems to be enough money to go around. Under these circumstances, how can someone save for retirement and meet their daily expenses?
In a recent survey conducted by CFP Board on the saving habits of 1,000 working Americans over 25, one group, identified as “Tentative Savers”, exemplifies this dilemma. Initially, this group appears well positioned to retire. Tentative Savers started saving in their early 30’s and have accumulated moderate investable assets. Moreover, nearly three-fourths of these individuals regularly save money on a monthly basis.
However, the majority of Tentative Savers feel behind on their retirement savings and are anxious or uncertain about their future financial situation, a concern that is likely the result of their numerous financial responsibilities. Tentative Savers are commonly middle-aged, responsible for a family, earn a middle income and often hold credit card or mortgage debt. Trapped by these competing duties, Tentative Savers are pressured to choose between saving for retirement and meeting everyday expenditures.
The answer lies in managing priorities and steadfast action. Here is some helpful advice for Tentative Savers planning for retirement:
- Create a concrete plan of action: Write out a set of goals and detail why these objectives are important to you. In addition, think through a response to various potential scenarios, such as job loss or a major health episode, to help prioritize your goals. Stress over savings is one of the dominant characteristics of a Tentative Saver. By examining these goals in depth, you can relieve anxiety and begin to formalize a retirement plan.
- Establish a 28/36 debt to income ratio: In other words, try to spend no more than 28% of your monthly income on housing expenses and no more than and additional 8% on debt so that total debt service does not exceed 36% of your monthly income. If you are unsure how to calculate or establish this ratio, using debt-to-income ratio calculators or meeting with a CERTIFIED FINANCIAL PLANNER™ professional can provide you with specific information to help you manage your budget.
- Manage credit card and mortgage debt: Both credit card and mortgage debt represent the most significant and concerning debt for Tentative Savers. For many, repaying these debts will be a priority over other considerations. Paying credit cards in full and adopting an aggressive plan to pay back outstanding debt can help reduce your financial burdens. Furthermore, using automatic saving plans to spend more on mortgage payments per month will help you feel like you are making progress on other sources of debt.
Tentative Savers must remember that no plan exists without trade-offs. However, there is room to be hopeful. Although Tentative Savers must balance numerous financial obligations, given the right preparation, they are also well positioned to save quickly. A CFP® professional can also help you better understand your options, create a plan and start taking specific actions to reach your retirement goals.