I went to my bank to deposit a check, and they asked me for ID. I said, “Are you telling me other people are trying to put money into my account and you’re telling them no?” —Comedian Rich Vos

Reader’s Digest

Ha, ha, jokes on us, because no one but we would put money away for us for our well-being.

I’ve written quite a bit about the stock market and the advantages of long-term investing. Some of my readers and twitter followers have been asking me, “Shaheeda, but how do I start? Where do I start? How do I plan for retirement?”

My partner and I have a made a simple retirement calculator for you to figure out your retirement planning. Check it out, it’s very easy to use and will motivate you to start taking control of your physical, mental and financial health.

4 Steps to Financial Freedom

1. Budget
2. Plan
3. Invest
4. Repeat

Step 1: Budget

This is the most important step. You need to first write down what your monthly income is and what are your monthly expenses. Once you know what your expenses are, be very clinical about going through each of your expenses and then see what you can reduce.

• I know you are the definition of style, but do you need to go to the salon every week? How about once in 6 weeks?
• If we didn’t post on instagram, did we really enjoy that fabulous brunch? Perhaps you can treat yourself once a month instead of every weekend?
• Do you really need to live in the ritziest part of town?
• Do you need that brand new sports car?

I wrote about how I saved 32% of my income. It may help you budget and save too. There are loads of free tools online that can help you get started. Here are links to a few you could try.

• Quicken: Super simple way to enter all your income and expenses by categories. Just go to the site and use the free tool to get an idea. If you want to use the full function, then pricing  starts at $34.99/yr
• YNAB (You Need A Budget): Good but not free. $11.99/month or $84/year
• Mint: Free. I had tried it many years ago. You have to connect your bank accounts, credit cards etc to the MINT application. Very easy to use, but I got worried after so many companies got hacked and had security breaches. So, I cancelled it. However, MINT does use 256-bit encryption and should be safe. It is good for beginners.
• Budgetpulse: Sign up for free to use it online.
• GnuCash: Free accounting software for both small businesses and personal finance management.

Step 2: Plan

Once you understand your income and expenses, then plan for your current and future life. Ask these questions:

• How much money do I need per month to live comfortably now?
• When do I want to retire?
• How much money would I need per month after I retire?

For example, perhaps you need $2,500 per month to live comfortable today and you earn $3,000 per month. So, your plan should be to Pay Yourself First towards:

1. Emergency Fund: Pay yourself first and save cash for 6 – 10 months in an emergency fund. That means you need to save $12,000 – $20,000 in cash in case of an emergency. Leave this cash in a high interest-bearing savings account.
2. Retirement Investment: Once you have squirreled away 6-10 months of emergency fund, you pay yourself first and invest in stocks, bonds, real estate or any other investment vehicle based on your goals and risk appetite.
3. In the case above if you put away $500 a month towards the emergency fund, it will take you 2 years to reach your goal. That’s ok. 
4. Once you’ve created your emergency fund of 6 months, you can start investing $300 in the stock market for example and $200 in the emergency fund until you reach a target of 10 months of emergency fund. 
5. After you are happy with your emergency fund, you can now start investing $500 per month and start building your retirement portfolio.

Step 3: Invest to Grow Your Wealth

If you know how much you need after you retire, you can figure out a plan to reach there. 

Suppose you are 28 years old and earn $36,000 per year. You want to retire at 65 and you want your retirement fund to be $1 Million by the time you retire. You have low to medium risk tolerance and are expecting an average return of 6% per year. In this case you will need to invest $655 per month until you are 65.

We noticed above that you are only saving $500 per month. So, either you have to reduce your expenses more or you have to increase your income. Since you are 28, it is likely you will get more promotions and higher income over the course of your lifetime. If you live till you are 85, and you retire with $1 Million, then, you can spend $50,000 per year during your retirement. This could be very good provided you also have great health care.

Suppose you are 35, your income is $50,000 and you want an expected return of 8% per year and you want to retire by the time you are 63, what would you have to invest every month to retire with $1 Million? 

You would have to invest $874 per month. If your life expectancy is 85, then you could spend $45,454 per year after you retire.

If you start saving sooner, you could save smaller amounts and take lower risks to grow your wealth.

Go ahead and use the retirement calculator to plan your monthly investments.

Step 4: Repeat

Steady, disciplined, consistent management of your finances and goals is key to a happy, worry free life. Every quarter, 6 months or at least every year, you must review all your goals as well as the Budget, Plan and Investment Portfolio. Make changes or adjustments to your budget, plan and investment strategy especially as you earn more or get older. For example, you can take more risk when you are in your 20’s and 30’s. If you are in your mid-50’s or closer to retirement, you may want to invest in less risky assets where your capital could be preserved with a modest return.

Final Thoughts

Every New Year’s Eve, since I was 30, I used to make the typical resolution. You know the one, “I’ll work out every day and get fit.” Of course, I always gave up couple of weeks. Last year, my father gave me an iWatch. On a random Tuesday in July last year, I decided to close all my workout rings in the Apple watch. To my delight Apple Watch lit up with sparkles and badges when I completed the workout challenges. On July 24^th, I thought, “Huh, I wonder if I can do it again”. Then a week later, Apple gave me more badges for being active all 7 days, then I thought, “I wonder if I can do a whole month.”

Today, I have closed my Apple Watch challenges 420 days straight. I love looking at all my badges and awards even though they have no financial value. Yes, I’m that kind of a nerd.

I think the way to your own financial health is also to take a small bite, and see if you can manage it 1 day at a time until it becomes a habit. 

Some of the budgeting tools are gamified and it’s fun to collect your rewards. Do it. I promise you won’t regret it. 

If you would like help on how to budget to save more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say@shaheedasays.com. I’d be happy to offer you my services. Please do check my other blogs here.

Disclaimer:

I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.