Plant the seeds for a healthy financial future

I'll save next month." "I'll put away money after I buy a new (fill in the blank)." "There's never anything left over after I pay my bills." Have you ever used any of these excuses to put off saving for your future? I know what you're thinking. Retirement is a long way off, and with any luck you'll fund it with lotto winnings, an inheritance from a distant, wealthy relative, or pennies that fall from the sky.

When money's tight, it's easy to understand why retirement doesn't top your list. Making ends meet each month takes priority over the distant future. Many people wage a constant battle between saving, investing, and paying off debts. Others are focused on short-term goals like a car or home purchase, saving for college, or putting money aside for that much-deserved vacation. Saving for retirement gets lost in the shuffle to keep up. A better strategy: Start small and start now.

Start with fertile ground

Just as you till before you plant and plant before you harvest, you must lay the groundwork for fruitful investing. Before you invest for retirement, use these steps to prepare so you can maximize your growth:

• Ensure adequate insurance coverage. Illnesses, accidents, fires, burglaries, and other tragic events can wreak havoc on your financial future if you lack sufficient insurance coverage. These risks are so great you can't bear them alone—you must transfer the risk to an insurance company. As you calculate your risks, also ask yourself whether your spouse or dependents would enjoy a reasonable quality of life if you died. If you answered "no," you may need more insurance.

• Wipe out credit card and other bad debt. It's almost always a good idea to get rid of credit card and other high-interest rate loans before you invest for retirement. When you retire debt, you effectively earn the rate you would have otherwise paid. For example, by paying off that 20 percent interest credit card, you're making a guaranteed, risk-free 20 percent. That makes it a no-brainer priority over investing for retirement. There's one exception: If your employer offers a retirement plan that will match your contributions up to a certain level, contribute up to that level—even if you have credit card debt—because you're getting a 100-percent guaranteed risk-free return on your investment.

If you're considering paying off mortgage and student loans early at the expense of investing for retirement, think again. These debts typically carry a reasonably low interest rate and offer some income tax advantages, so it's better to focus on investing rather than eliminating these debts quicker.

• Build a modest cash cushion. Emergencies happen—your car needs a new muffler, the basement floods, your cat needs emergency surgery. When you create a modest cash cushion, you won't need to pay these inevitable but unexpected expenses with a credit card. This emergency fund should cover three to six months of living expenses and be accessible to you within 24 to 48 hours. Your job security and the flexibility of your monthly expenditures should determine the exact amount to set aside. If you can rely on family or friends or a home equity loan to initially pay for the expense, include those options when estimating how much cash you'll need to save. Then transfer that amount from your checking account to a savings or money market account to put it a bit out of reach and earn interest.

Plant your seeds

Now that you've prepared a solid foundation, you're ready to start investing. When planning for retirement, your biggest obstacle is likely finding seed money. Collecting a few hundred dollars might require diligence and cost cutting. You might even feel you'll never accumulate enough to begin. But you don't need a big bankroll to start investing. You can successfully invest using the amount of money most people spend on soda or coffee every month (see "8 Ways to Trim Your Expenses").

In the early 1980's,Americans saved

When you start small, you're developing a habit of saving that creates wealth. Just as a towering oak tree springs forth from a miniscule acorn, a money tree can grow from a tiny seed of capital. Starting small works for saving and investing.

Want more?

Let's start with saving. If you spend as much as your earn—and most people do—you need to slowly decrease your spending. Each month, choose one way to spend less on items you don't need. For example, if you spend $5 a day on fast food, brown bag it a couple days a week. Bring your java from home, cancel cable and magazine subscriptions, and check out movies from your local public library. Are you saving tons of money? No, but you are saving—and that's what's important.

8 ways to trim your expenses

If you consistently spend less each month, you'll make cumulative progress and begin to take control over your finances. This habit will help you eliminate debt faster and you'll develop wealth slowly but persistently. Starting small and being patient and methodical is far better than not starting at all.

8 rules of successful investing

Now, let's look at investing. Here's where you can transform your Maltese savings into a Mastiff retirement fund. First, check out any investment options your job offers. Some employers provide a retirement plan and match some portion of your contribution to encourage participation. That's free money. Your employer automatically deducts the payment from your paycheck, so you don't miss it. And because it's pretax income, less of your paycheck goes to Uncle Sam. You'll pay taxes when you withdraw the money, but that could be decades away.

If your employer doesn't offer a retirement plan—and many private practices don't—you'll need to establish a personal plan, such as a Roth Individual Retirement Account (IRA). You'll fund this account with money that's already been taxed, so you won't need to pay any taxes when you withdraw the money. Many mutual fund companies offer automatic deductions—usually for amounts of $50 or more—from your checking account each month. This eliminates the chance that you'll forget to save or spend the money on less worthy items.

The fruits of your labor

Watch your seeds spread

As Albert Einstein once said, "Nothing is more powerful than the power of compound interest. It is the eighth wonder of the world." (See "8 Rules of Successful Investing".)

Consider this: An investor who starts saving when she's 32 and contributes $100 a month to a Roth IRA will have about $340,000 when she's 65, assuming she earns a 10.4 percent annual return—the long-term average of large company stocks in the United States. But an investor who starts saving when she's 22 and contributes $100 a month will have about $980,000—a quantum difference.

Since compounding helps your money grow over time, it's possible for small contributions to produce a comfortable retirement. And by opening an account early in your career and making regular deposits—even if they seem small—you're developing good investing habits that promote financial security and freedom.

You're never too young—or old—to worry about your financial future. And since even a little money can go a long way toward building a secure retirement, why wait to get started? You want to put your money to work so, eventually, you won't need to. It's relatively painless, and the rewards are bountiful. Seize control of your financial future today; plant your seeds and watch them grow.

Fritz Wood, CPA, CFP

Fritz Wood, CPA, CFP, is a financial consultant who owns H.F. Wood Consulting in Lake Quivira, Kan. Send questions or comments to firstline@advanstar.com