Many people consider retirement the golden years. After decades of working, it's the time to sit back and do whatever brings them joy. Whether you're traveling the world, spending more time with family, relaxing as much as possible, or whatever else, one thing remains true: Being financially stable in those years can remove unnecessary stress.
A key part of being financially stable in retirement is beginning the saving and investing process as early as you can. Time and its effect on compound earnings are among investors' greatest assets. However, sometimes, saving for retirement should take a back seat to more pressing financial obligations. Here are three financial moves you should make before saving for retirement becomes a priority.
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1. Establish an emergency fund
Establishing an emergency fund is one of the most important things anyone can do financially. If you live long enough, you'll know that life tends to throw curveballs. Sometimes, you get laid off, your car breaks down, your house needs a roof replaced, or a medical expense pops up. Mishaps are, unfortunately, endless.
Having an emergency fund for these situations helps ensure that you don't have to take other (typically more expensive) measures to get the cash you need. For example, a personal loan means paying interest, running up your credit card means paying interest, and withdrawing early from a 401(k) means a 10% penalty and owed taxes.
There's no one-number-fits-all regarding how much your emergency fund should be, but generally, you should aim to have at least three to six months' worth of living expenses. This should include housing, transportation, food, debt, insurance, and any other repeating expenses you have.
If you have $5,000 in monthly expenses, you should aim to have $15,000 to $30,000 in your emergency fund. Three months may work for those who are single and only financially responsible for themselves. If you have a family and are responsible for others, the goal should be to lean closer to six months.
2. Pay down credit card debt
Using credit cards can be a double-edged sword. You can receive great perks and rewards for spending money that you'd (presumably) have spent regardless. However, not paying off your balance in full each month can result in high interest owed on balances.
Before you prioritize your retirement savings and investing, be sure to knock down your credit card debt as much as possible. Aside from Treasury bonds, returns on investments aren't guaranteed. However, the interest you owe on credit card debt is guaranteed.
You don't want to find yourself in a situation where you're saving and investing for retirement and earning less in gains than you're paying in interest for your credit card debt.
3. Make sure your credit score is at acceptable levels
Your credit report can be viewed as your financial report card. It gives lenders an idea of how trustworthy you are to receive loans and lines of credit. There are shortcomings in credit scores, but the reality is that they are a fundamental part of American life.
Your credit score will determine many aspects of your financial opportunities and interest rates throughout life. It'll be used when you're applying for rentals, and determine what interest rates you receive on mortgages and loans. It also sometimes affects your insurance premiums.
Making sure you have a good credit score can easily save you thousands of dollars in interest throughout your career. That's money that can be going toward retirement savings and investing instead of toward lenders. A few percentage points' difference in interest rates may seem small on paper, but they add up to tangible amounts in real life.
Improving your credit score and paying down credit card debt can go hand in hand. Credit utilization -- which is the amount of credit you're using compared to how much is available to you -- represents 30% of what's used to calculate your credit score. Keeping your credit card balance down can go a long way toward improving your credit score.
