How to Master Personal Finance Before Retiring

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There’s not a large percentage of people who claim to have mastered personal finance. But—hopefully—those people will have mastered it by the time they retire. Actually, you should hope to master your finances well before you retire, or else you might not be able to retire at all.

If you want to enjoy your golden years without worrying about money, then you’ve got to save up enough money for retirement and you’ve also got to make your living expenses more manageable by paying down your debt. Of course, that’s all easier said than done. So let’s walk you through the necessary steps to master your personal finances before you retire.

Create the Right Blend of Savings Accounts

There are two main types of bank accounts: a checking account, which is for spending, and a savings account, which is for… well, saving. A lot of people make the mistake of using a single savings account to stash money for retirement, vacation, college funds, and rainy-day funds. But that’s not the best way to approach saving.

There are two problems with using a single savings account. First, it’s more difficult to figure out how much money you’ve actually saved for each of your saving items (“how much of my $10,000 is for retirement and how much is for my cruise next summer?”). Second, a standard savings account doesn’t yield a whole lot of interest. If your money is going to be sitting in the bank for years to come, you should have it in an account that generates higher interest.

Here’s how you could allocate your savings accounts:

  • Standard Savings Account: Have a standard savings account for each of your “short-term” savings, like vacations, holiday spending, a mortgage down payment, or paying for material items.
  • High-Yield Savings Account/CD: These accounts generate higher interest. Use this type of account to store a rainy-day fund or mortgage down payment you plan on making in ten years or longer.
  • Retirement Accounts: Your business might offer a 401K retirement plan. You could also put retirement funds in an IRA account.

Develop a Passive Income

Your primary income is whatever income you earn from your day job(s). A passive income is money you earn on the side—which, ideally, you don’t have to put too many hours into each week. There are so many different ways to develop a passive income, but one of the best ways is to invest in the stock market. Stocks are at an all-time high, so there’s no better time to get started.

When you own stock, you’ll receive small dividends because you technically own part of the company. Rather than spending these dividends, use them to buy more stock. The more stock that you buy, the more dividends you’ll receive over time. If you invest in the right companies, you may have a steady stream of income by the time you retire—no work required.

Invest in a Home

The most challenging cost for retirees is the cost of housing. You could have a lot more money in retirement if you paid off a home or condo before you retired—or, at the very least, get within a few years of paying it off. Most mortgages are paid over 30 year periods, so you might want to start looking into buying property if you plan on retiring within that time span.

A lot of people ask the question, “how much do I need to retire at 62?” The answer to that question is largely dependent on what your housing costs are going to be when you retire at 62. Even if you haven’t paid off your home by then, you could try and at least pay most of it off so you could benefit from a reverse mortgage—which could be a good option for retirees who have lots of equity in their property. Point is, you should start doing research on mortgages sooner rather than later (and be sure to pick a good realtor so you’ll get a great deal).

Budget

A common money myth is that only rich people are taught how to properly manage their finances. But the truth is, the best way to master personal finance is to master budgeting—and anyone can do that. Use a simple budgeting app to list your monthly expenses and income. For all the money you have left, figure out how to allocate it. Be sure to leave some extra money for:

  • Savings and retirement contributions
  • Rainy day funds
  • Spending (because you deserve to do fun things with your money, and also because having a spending budget can prevent you from overspending)

Make it a habit to thoroughly review your budget each month. Just knowing what your budget is can help you be more disciplined when it comes to money management.

Pay Down Your Debt

Last, but not least, work on paying down your debt. Your monthly loan payments should be factored into your budget as your monthly expenses. But if you have any extra spending money, consider putting some extra cash into those accounts and try and pay them off faster. And, of course, be careful about credit card spending because it can put you into a real financial bind.

Wasn’t too hard, was it? Follow these tips and you’ll be the master of your finances before you know it.