(“kapow!” is the universal sound of action)
Look at the gross income on your pay stub. Now, immediately put an amount equal to 10% of that gross away. If you are self-employed, this is the amount you bring in after paying business expenses but before taking out taxes. Set up an automatic draft so you don’t even see it in your checking account. Some employers who use automatic deposit can set up your paycheck to go to multiple accounts (ask your HR person). If that seems too drastic, start with 2% for two months. Then double it to 4% for two months. Then 6% for two months, etc. By increasing the amount incrementally it won’t be as painful and you’ll have time to adjust your budget.Action Item #2: Have proper cash and emergency reserves.
Cash reserves are what you can access quickly and without tremendous penalties; cash is used to pay for things like vacations, car repairs, broken water heaters and the like. Emergency reserves would be used if your household tax bracket drops drastically (say you take a year off to be a missionary or there’s a death in the family that requires an extended absence from work). The amount you have in emergency reserves should be about 20% of your mortgage balance OR twice the amount of cash reserves. Usually your emergency reserves are in money market funds or tax deferred vehicles (you’ll pay a penalty to take the money out, but your low tax bracket should offset the cost).
Action Item #3: Have a properly allocated investment portfolio.
Once you know your own personal levels of risk tolerance, and your specific investment or retirement goals, you should immediately balance your portfolio to reflect that information. This is often the step people drag their feet on, it seems the most daunting. Don’t delay, though, this one is critical to your long term success. No sense in having a investment strategy if you don’t employ it!
Are you ready to take action?