As you start the new year, you’ve probably already made several new year’s resolutions. such as eating healthier, working out more, and getting into better shape. But what about your financial future? What kind of shape is your TSP and portfolio in? Is your family properly covered if something should happen to you? How much do you currently have saved for your retirement?
The real question: How confident are you that you are on track to have the money you need when you need it?
As our team conducts retirement workshops throughout the country to thousands of federal employees each year, we often hear the challenges that so many of you face when it comes to financial planning. In the spirit of kicking off the new year right, we put together 10 tips to help you get started on your financial planning journey and make the most of your financial resolutions.
Your 10 Tips for the New Year
Tip #1: Make sure that your spouse or significant other is involved. It’s critical that you’re on the same page as your spouse. There is one thing that I really took away from my time in the Marine Corps, and that is ‘perspective’. What you see depends on where you sit. That happens in an organization like the military as well as in a marriage. Make sure that both of you are involved in these important decisions so that both of your perspectives can be taken into consideration when planning for your financial future and retirement.
Tip #2: Identify your financial goals. That’s the first step to any plan. Even if you’re just going to the grocery store to pick up what you need for dinner, you have a plan. You know what you need to get at the end of that transaction, and that’s exactly what you need to do on the financial planning side. The first step to any plan is to figure out what you want.
Figuring out what you want when it comes to money can be an interesting exercise. You probably have short-range goals that you want to accomplish in the very near future. For example, if you know you have to replace that hot water tank soon, or you have a car that needs to be repaired, you may want to save up for these types of short-range expenses that may cost you a lot of money out-of-pocket very soon.
Then you’ll have more medium-range goals. Some very common medium-range goals would be saving up for a new car or setting up a college fund for your kids. Those are some goals that you can begin thinking about and planning for now. That time will be here before you know it!
Of course, you have the long-range goals such as retirement. You might want to purchase a new home or travel more during this time of your life. I always encourage folks to really take a hard look at the end game. What is it that you want to accomplish at those different stages of your life?
Tip #3: Live within your means. When I first started my financial plan at 21 years old, I was a Lance Corporal in the Marine Corps, and one of the most profound things that I remember my financial advisor telling me was that I had to “pay myself first.” It’s the idea that you have to live within your means, so you don’t spend more than you have. You don’t want to run out of money on the 20th of the month when you have 31 days to get through, so you want to “pay yourself” first. That’s not to say you pay yourself to get the brand-new car you don’t need or own a home that’s really out of your budget, but instead setting aside money for your future goals. You want to trim your budget for the long-term good as much as possible. So, can you squeeze your budget a little bit to find another $100 or $200 or $500 a month that you’re wasting on the non-essential items and put it towards something really great? I challenge you that you can.
Tip #4: Use pay raises (or step increases) to beef up your savings. Since it’s the start of the new year, it’s the perfect time to utilize any pay raises or step increases to advance your financial strategy. Let’s say with your next step increase that you have an extra $100 per month coming into your paycheck. Obviously, you need to account for inflation and the rising cost-of-living expenses in your budget, but if you can take half of that $100 a month to put it towards something good—whether that’s investing more, life insurance, a long-term care solution, or just more savings—any of those things would be really powerful. It’s amazing how much you can accomplish if you just take those advances in your pay to help fund your future.
Tip #5: Tackle your debt. When it comes to debt, it can be one of those overwhelming, frustrating and kind of embarrassing parts of your life. You end up racking up debt and then have to figure out how to pay it all off. The first step in tackling your debts is to identify what they are. That’s the dollar amount that you owe, the interest rate that you’re paying, and the minimum monthly payments. That’s the starting point. What’s the bare minimum that each of these companies need to be satisfied each month?
The next step is the idea of the “snowball plan,” and this is a very common financial planning theme when it comes to tackling debt. It’s the idea that you pay off the highest interest debt first and work your way down the list. Maybe that’s a credit card that has 20% interest rate. You pay that down first, and when you’re done paying that, the money that you were putting towards that particular debt, you snowball that payment into the next highest interest rate obligation. If you have another credit card that’s at 18% interest, you’re just going to continue to roll extra money into that payment until eventually, all of that discretionary income is just attacking and crushing the debt that you currently have.
Of course, it goes without saying that part of tackling your debt is not accumulating more debt. So, don’t use those credit cards unless it’s absolutely necessary, which brings us to the next tip.
Tip #6: Establish an emergency fund. Without an emergency fund, you can end up turning to things like credit cards because you don’t have enough money on hand to be able to do things like fix the hot water tank or get the car repaired, whatever that might be. Having that emergency fund allows you to buffer or cushion your normal household expenses when those things come up, and only use this bucket of money for truly unexpected and necessary expenses. This is not the vacation fund. This is not the new TV fund. This is not the new car fund or fancy sunglasses fund. This is only for true emergencies.
Tip #7: Increase your TSP contributions. Most federal employees who I meet are contributing to the Thrift Savings Plan (TSP), and I’m always so happy to hear that. TSP is great in many ways, especially when you’re putting the money in. Of course, you want to make sure that if you’re a FERS employee, that you’re putting in at least enough to get all the free money out of TSP, which is the FERS match. In order to do that, FERS employees must put in 5% of their pay, and their agencies end up putting in 5% of their pay as well. Every single pay period, you’re going to get that free money as long as you’ve spread out your contributions over all pay periods in the year.
Regardless if you’re a CSRS or FERS employee, can you challenge yourself to contribute more to the TSP? Is that 1% more? How can you max out the TSP at $22,500 per year? How can you get the full catch-up contribution of $7,500 per year (available in the year you turn 50)? Wherever you’re at today, how can you step up your game just a little bit and make that work in your budget?
Tip #8: Diversify your investments. You want to ensure that the diversification of the funds that you have in the TSP or any investment out there really match where you should be at your stage in life. You don’t want to be too aggressive. You don’t want to be too conservative either. You want to make sure that all of the money that you’re socking away in an account like the TSP is working appropriately based on your timeline for needing the money and the amount of risk you’re willing to take. I encourage you to consult a financial professional who understands the options available to you as federal employees and will help you to maximize them. CLICK HERE if you would like an introduction to a financial professional nearby who is in the ProFeds nationwide network.
Tip #9: Transfer risk. From a financial planning standpoint, transferring risk is a very important thing to do. A good example is homeowners insurance. If your house burns down, you’ve paid a premium every month to your insurance company so that when that happens 15 or 20 years later, it’s not you, the individual, paying to have your house rebuilt. You might have a deductible, but ultimately, it’s the insurance company that’s shouldering the vast majority of the risk of your house. Same thing happens with automobile insurance, long-term care insurance, health insurance, and life insurance. Those are all risk transfers and something that’s very important for you to have, because most people don’t typically have the capacity to shoulder all of that risk themselves.
Tip #10: Have your legal aspects in order. One legal item that’s very important is updating your beneficiaries. For all the accounts that you have on the federal side, make sure that the right person is going to get them if something should happen to you. If you need those forms, you can go to fedimpact.com/beneficiaries. All the forms are listed right there for you.
Other legal aspects are things like wills. Do you have an estate planning trust? If you have minor children, how do you want your money left to them so that you’re sure it’s used appropriately? Do you have special needs children who will grow up to be special needs adults and they need some special direction on how the money is going to be used? These are things for you to begin thinking about to ensure that your wishes are carried out if something should happen to you. Of course, it’s also important that you make a copy of all these documents—a trust, wills, beneficiary documents, etc.—and keep them in a safe place where your family can easily find them.
I hope these 10 tips get you thinking about taking some serious steps in your financial planning for this year. It’s amazing when you really put your nose to the grindstone what you can accomplish in a year. Don’t be afraid to make big goals in the new year and put a plan in place to tackle them!