Still Unsure About Retirement Savings? Suze Orman’s Playbook for Catching Up Without Panicking
It’s never too late to organize your finances, build your savings and get closer to the nest egg that you need to retire.
Personal finance expert Suze Orman has taught people how to achieve financial freedom for decades, and her playbook offers a solid foundation for those who are just getting started or need a refresher. Here’s an Orman-inspired, four-step guide to saving enough to reach your money goals without panicking.
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1. Do an inventory
The first step to changing your finances is to understand where you’re starting from. Review your income and where your money is going each month, whether that’s on spending, debt payments, savings or investments.
Writing down these figures will help you determine how much you can save toward your retirement and other goals moving forward, and whether there are any costs you can eliminate.
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2. Check on your emergency fund
Orman regularly asks her audience how long they could stay afloat if their paychecks stopped tomorrow. It’s a question that can help you get a sense of whether you need to build your emergency fund so that you’d be prepared to cover the unexpected, such as a surprise medical bill.
Financial advisors tend to recommend having enough money saved in a liquid account, such as a high-yield savings account, to be able to cover three to six months’ worth of your living expenses (think factors like housing, utilities, groceries and gas). Orman recommends saving even more: She says to set aside enough to cover at least eight months of living costs. If you’re in retirement, you probably want to bump that number up to at least one to two years’ worth of your expenses.
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3. Sort your money into needs and wants
In order to save, it’s important to understand your spending patterns and use those to determine how much you should save going forward. Reviewing your spending can help you group expenses into two groups: wants and needs.
Needs are your essential purchases, such as food and housing. While it’s possible to downsize your home to save money, you still have to pay for housing — it’s not something you can cut completely from your budget. Wants are non-essential purchases, such as concert tickets or a vacation with friends.
After you assess your previous spending, sort your goals into wants and needs. Perhaps you’re allocating more to your wants than your needs, which could cause financial issues in the near term.
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4. Create an action plan for saving
Even if retirement is within reach, you can still better your finances before you say goodbye to your job for good. A disciplined five-year window may give you enough time to course correct and move closer to your long-term financial goals. Set realistic targets for each year that center around your savings rate, debt reduction and income growth.
For example, maybe you can start making catch-up contributions to your retirement savings accounts, or aim to pay off your mortgage before you retire.