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It may seem unrealistic to plan for long-term goals when your everyday budget is strained or your income irregular. So much of your time is consumed simply getting by that planning for the future could feel like a luxury.
But despite having limited funds, having long-term goals assists you in developing stability and minimizing stress in the future. You have access to savings accounts, retirement plans, and even professional help such as investment management, and these can set the stage for larger opportunities even when you're on a tight budget.
Having funds in an emergency fund account ensures that unexpected expenses won't blow your progress toward long-term objectives. That's even more critical if you live on a tight budget. With an emergency fund, you're less likely to charge surprise expenses on credit cards, use payday loans, or borrow other high-interest debt.
Of course, carving out savings is harder when money is tight. One way to manage it is to start small. Moving just a few dollars from each paycheck may not seem like a lot, but it can build a cushion over time.
Bonus tip: Automating the process with regular transfers from checking to savings makes it even simpler to build your emergency fund on a schedule that aligns with your payday.
Addressing high-interest debt is essential to freeing up cash to use in the future. Once again, easier said than done when you're just scraping by, but you do have alternatives. Two popular plans of attack for paying off debt are:
The snowball method, in which you pay off the smallest loan first.
The avalanche method, in which you pay off the loan with the highest interest rate first.
Both methods assume you're paying the minimum monthly on all of your debts, then applying whatever extra cash you have to either your smallest loan (snowball) or highest-interest loan (avalanche). As soon as you've paid off that debt, you apply the payment to the next balance until all of your debts are paid.
Selecting the best method is based on your own circumstances. Professional planners usually suggest the snowball approach for those who want to have some quick successes in order to be motivated and the avalanche approach if you are interested in saving interest in general.
Bonus tip: Managing debt is not just about paying down debt. Borrowing money can at times be good for your long-term finances – for instance, if it enables you to roll over debt with a lower interest rate. Just make sure the payoff is worth it, and the payments are within your budget.
Investing is an important part of long-term financial planning because many investments grow through compounding. Compounding is the process where investment earnings, like dividends, interest, or capital gains, are reinvested and generate their own returns. Over time, compounding can snowball into significant growth.
One of the simplest investments to make is in an employer-sponsored retirement plan. You get to choose how much of your salary to send to the plan, and the money goes into the plan before it becomes available for you to spend it. Employers also match what you contribute, which speeds up your savings.
If your employer does not have a retirement plan, you can consider opening an Individual Retirement Account (IRA) with a bank or brokerage. Most accounts charge little or no setup fees and have no minimum balance to maintain.
Index funds, which are meant to track the performance of a particular market index such as the S&P 500, represent another cost-friendly investment option. They don't usually have initiation fees, and you might only require enough to purchase a single share to begin.
Bonus tip: As you accumulate your savings and settle your debt, professional investment management might come in handy in helping you diversify and optimize your strategy.
Keeping costs in mind, such as fees, interest charges, and taxes, is key to long-term financial planning. On the one hand, it saves you from costly surprises. On the other, understanding where costs originate allows you to diminish their effects.
These are a few to look out for:
Fees on accounts: When opening a savings account or beginning to invest, request fee plans prior to selecting a service provider. Numerous banks and brokerages charge low- and no-fee accounts.
Fees for advisors: Conventional advisors often charge a percentage of what you invest annually, but alternative choices exist in the form of flat-fee or hourly-rate advisors.
Interest: Every loan – credit cards to mortgages – incurs interest. Understanding your rate and comparing it to options can save you money in the long term.
Taxes: Certain accounts, such as IRAs and 401(k)s, allow you to delay or lower taxes on your contributions and returns so more of your money remains invested and takes advantage of compounding. Knowing tax deadlines and contribution limits also saves you from costly fines.
Bonus tip: Periodic review of fees, interest rates, and tax regulations can uncover opportunities to save money. Even small changes such as changing to a low-fee fund, refinancing debt, or maximizing tax-favored contributions can add up to big savings in the long run.
Budgeting doesn't have to mean sacrificing long-term money plans. Taking proactive steps to save, pay off debt, invest, and be frugal sets you up for success down the line. At first, those habits might seem insignificant, but they add up over time and gain momentum that can propel you toward greater financial objectives.
