Whether you're saving for retirement, establishing an emergency fund, or paying down debt, financial preparedness doesn't happen overnight. It's a lifelong skill that requires practice, and unfortunately, not many Americans have mastered that skill, according to a new survey from financial institution Primerica.
In Primerica's 2019 Financial Security Monitor Insights Report, researchers asked participants about whether they engage in these five financial preparedness fundamentals.
1. Making more than the minimum payment on credit card bills every month
2. Having $50,000 or more in life insurance coverage
3. Saving every month, regardless of amount
4. Investing some of their savings in accounts other than cash
5. Having enough savings to cover three months of expenses if the primary breadwinner lost his or her job
How many of these things have you accomplished? If you're doing all five, give yourself props, because researchers found that only one in 10 participants could say the same.
The most concerning part of the results, however, were how many people are doing very few of these things. Twenty-three percent of participants have achieved none or just one of these financial fundamentals, and a whopping 69% have done three or fewer.
If you're not doing at least some of these tasks, you could be setting yourself up for a financial disaster down the road. For example, two of the most important things on the list are saving every month and having enough savings to cover three months' worth of expenses. If you're not doing those things right now, they should be your first priority on your path to financial preparedness.
Why saving a little now beats saving more later
It's easy to put off saving for retirement, especially if money is tight. You can tell yourself that you'll just make up for it by saving more once you get that raise, start a new job, or the kids move out and you have fewer expenses to worry about. The truth, though, is that it's exponentially more difficult to rack up the same kind of savings you'd see if you had started saving earlier.
For example, say you're 30 years old with nothing saved for retirement, and you can only manage to save $100 per month. If you're earning a 7% annual rate of return on your investments, you'd have around $166,000 saved by age 65. In another scenario, say you held off on saving anything until age 45, but you started saving $300 per month. If you're still earning a 7% return, you'd have around $147,000 saved by age 65. So even though you'd be saving three times as much, it doesn't make up for getting off to a late start.
If you're struggling to find any money to set aside for retirement, take a deep dive into your budget and see where you can make cuts. You don't need to make any drastic slashes, but just trimming a few dollars here and there can make a big difference. Maybe that means using coupons at the grocery store, or designating one day per week as a "no spend day," for instance.
Also, it helps to view saving for retirement as just another necessary expense. If you tell yourself that it's OK if you don't save at least a little bit every single month, you can quickly fall into the habit of going long periods without saving anything. Instead, think of saving for retirement like paying rent or the electric bill. You can't get away with skipping rent for a month just because you can't find the money, so you shouldn't get away with not saving for retirement either. It may be tough sometimes to scrounge up something to save, but your wallet will thank you as you near retirement age.
Keep your retirement savings strong with an emergency fund
Once you begin saving for retirement, don't touch that money. If you use your retirement fund like a savings account you can pull from whenever you need a little extra cash, you're not doing yourself any favors.
A quarter of American households say they've withdrawn money from their 401(k) for non-retirement needs, and of those who cashed out their entire balance, 75% did so because they were facing basic money management problems, according to a survey from HelloWallet. Also, considering the fact that 40% of people don't have enough cash to cover a $400 expense, according to the Federal Reserve Board, it's no surprise that people turn to their retirement fund when an unexpected cost pops up.
That's why it's crucial to have an emergency fund to cover everything from unexpected costs to job losses. Ideally, you'll have enough to cover three to six months' worth of expenses, so if you lose your job or your car starts making a funny noise, you won't need to pull from your retirement fund just to make ends meet.
Yes, it's another area where you'll need to save -- and if you're still struggling to come up with something to put toward retirement each month, it may seem impossible to establish an emergency fund on top of that. But unlike saving for retirement (which takes decades), you can usually save up enough for an emergency fund within a year or so. So even if you need to make some drastic cuts in certain areas of your budget to put money toward retirement and an emergency fund, just know that it's a temporary sacrifice until that fund is big and strong.
When money is tight, you may feel like you're making it through one day at a time. But if you don't prepare for the future, an unexpected expense can wipe out all your hard work, and you may end up working the rest of your life. Instead, start taking steps now to become more financially prepared for anything that comes your way.