A Gift for Dad This Father’s Day: Financially Independent Kids
When it comes to pleasing Dad on Father's Day, there are a lot of possible gift ideas. A subscription to a "bacon-of-the-month" club, the latest grilling tools or a new golf bag could be a good fit.
But there's a gift Dad might appreciate even more—and one that will stand the test of time: financially independent kids.
Here are five ways to show Dad that when it comes to saving for the future and keeping your finances in check, you've got it covered.
1. Confront Your Cash Flow
Know what money is coming in and what is going out every month. This is the first step to setting up a realistic budget or spending plan. To figure out where your money is going, pull together your credit card and bank statements from the past month. If you made any cash purchases, add those to your list. You want to tally up ALL expenses, including big or fixed items, like your rent or mortgage payments, insurance and utilities, and then add all your smaller, variable expenses, such as groceries, dinners out, concert tickets and even your morning coffee fix. Add it all up. What do you get?
Next, you'll want to compare this number to how much money you have coming in each month—typically this will be your paycheck (after all taxes and withholdings). Subtract your expenses from your income and you'll know if you're ahead, behind or breaking even for the month. Once you know where you stand, you can come up with a plan.
If you find you've overspent at the end of each month, think of ways you can cut back in the future. If you come in under budget, consider transferring those extra dollars into a savings account.
2. Save Automatically
Sometimes the best approach to saving is the "out of sight, out of mind" strategy. There are two things you can do to fight the impulse to spend every dollar that comes in. First, set aside a certain amount of your paycheck each month that goes into an actual savings account, not your checking account. This is the "out of sight" part. If you keep your extra cash in your checking account, you will likely be more tempted to spend it.
The second thing to do is set up a regular, automated transfer so you don't even have to think about it. This is where the "out of mind" part comes in. Banks and financial firms typically allow consumers to schedule regular money transfers to a savings, money market account or IRA. You also might have the option of having part of your paycheck deposited directly into a savings account. This strategy will make it easier to budget and save.
3. Set Some Short-Term and Long-Term Financial Goals
An important part of any saving strategy is to have clear short-term and long-term financial goals. Setting goals helps you to stay focused on saving and gives meaning to the dollars you put away.
Some goals will take longer to achieve than others, which is why it's good to set some short-term goals, such as cutting down credit card debt or building an emergency fund. If you are only focusing on saving for events far in the future, like retirement or funding a child's education, your long-term goals can begin to feel overwhelming. Your short-term goals can help you stay on track toward achieving those goals that are further down the road.
4. Make Retirement Saving a Priority Now
It might seem far off, but your retirement nest egg needs a lot of time to grow before it can provide you with a livable income after you stop working. Taking steps early to plan for your retirement will pay off in the end. To get you started, you will need to think about longevity and how much money you will need in retirement. Use the Social Security Administration's Life Expectancy Calculator to help determine how many years of retirement you might need to plan and save for.
Then try one or more retirement calculators to estimate how much you'll need to save now to meet your likely expenses. Many retirement experts estimate you'll need between 70 and 85 percent of your pre-retirement income to maintain your standard of living after you stop working. But that formula might be too simple, and possibly too low, to account for what you'll actually spend.
If you have the option, use tax-advantaged savings accounts like a 401(k) to save money on taxes and boost retirement security. Contributions to a traditional 401(k) are not subject to income tax withholding and are not included in your taxable wages—and earnings on Roth 401(k) contributions are tax-free. In 2018, contribution limits increased, so you can contribute up to $18,500 annually to your 401(k). Some employers also offer to match your contributions up to a certain amount, so make sure you are saving enough to max out on your company's match.
5. Commit To Being Financially Capable
Financial literacy is strongly correlated with behavior that is indicative of financial capability. In other words, if you have higher financial literacy you are more likely to make good financial decisions, like planning for retirement and having an emergency fund. You are also less likely to engage in expensive credit card behaviors that might compromise a secure financial future.
Findings from the FINRA Investor Education Foundation's National Financial Capability Study (NFCS) reveal that many Americans demonstrate relatively low levels of financial literacy and have difficulty applying financial decision-making skills to real-life situations. In the U.S., about 61 percent of respondents were unable to answer more than three questions correctly on a five-question financial literacy quiz, according to NFCS data.
But you can change that. Take the NFCS Financial Literacy Quiz now and then go to work to boost your financial literacy.
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