4 financial milestones you must reach before retirement

Have the right financial habits in place

Are you ready to retire? You might be looking forward to saying goodbye to the 40-hour work week, but financial readiness is a different thing. In truth, living without a paycheck requires more than some money in the bank and the ability to cash Social Security checks. You also need to have the right financial habits in place.

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It's easy to be overconfident about our financial skills when we're earning a paycheck. Regular income increases from annual raises and the occasional promotion allow us to cut corners and catch up later. But once the paycheck goes away, there's no more catching up. You have to live on a perpetually fixed income. And that will quickly expose any lax money habits you might have.

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That's why it's important to work on improving your financial skills as you build your savings to fund retirement. Reach these four milestones, and you'll know you have the right skills and mindset to live on a fixed income.

1. You can budget confidently

Budgeting doesn't mean you know generally how much you spend each month. It means you know exactly how much you spend. You know at the point of purchase whether that thing you're buying falls within or outside the spending limits you've made for yourself. You also know how long it will take you to save up for a larger purchase, how you will pay for seasonal expenses such as holiday gifts, and how you'll make up for the occasional splurge.

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Getting to this level of expertise on your own spending isn't easy. You have to experiment until you find a process that works for you. You might use a spreadsheet or an app to monitor your transactions. Or, you might spend five minutes reviewing your bank accounts online every other day. Whatever the system, you need a firm grasp on where your money goes and how that spending is split between essential and discretionary purchases.

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2. You have control over spending

Once you understand your spending in depth, you can take steps to control it. Start by choosing one expense category, such as food, and set a goal to reduce your spending there by 10% or more. Challenge yourself to be resourceful. You might have to cook differently, plan out your meals, and give up a few indulgences in addition to the usual cost-cutting measures of clipping coupons and buying in bulk.

Reach that 10% savings goal on food, and then move on to another category and repeat. You'll probably find that focusing on your spending naturally creates savings by eliminating mindless purchases. And then you can get creative, cut back, price shop, and even freeze spending temporarily to uncover additional savings. Along the way, you'll realize that you do have control over your spending, and you're fully capable of living under your self-imposed spending limits.

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3. You have an emergency fund

When you get a handle on spending, you can start saving. You may have survived in your working life by using credit cards for emergencies, but that habit must change before you retire. At that point, you won't have the promise of a future raise to help you out of debt, so you'll need cash on hand to cover the unexpected.

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Experts recommend keeping at least three months of living expenses on hand in a cash account. Heading into retirement, it's a good idea to target more than that, say six or 12 months of expenses. That will give you more flexibility to manage emergencies and to reduce distributions from your 401(k) or IRA when the market's going through a rough patch.

4. You have no revolving debt

If you've already reeled in your spending and padded your emergency fund, that should automatically minimize new credit card debt. The next thing to do is pay off your old credit card debt. Tackle those revolving balances one at a time. The conventional approach is to pay more on the highest-rate card and send minimum payments to the other accounts. Each time you get a balance down to zero, that frees up more cash to send to the remaining accounts.

Alternatively, you could consolidate your card balances to a lower rate if you have good credit. Try taking advantage of your home equity line of credit or a 0% balance transfer offer. Doing so will lower your interest costs and expedite your repayment. Just make sure you chop up the old cards and stay on top of your spending so you don't slip and run up those balances again.

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Master your money

Yes, you do need a big savings balance to retire comfortably. But you also need the right money skills to make sure your wealth lasts. Get comfortable budgeting, controlling your spending, saving cash for a rainy day, and living without revolving debt. Those financial skills are just as important as the number of digits in your 401(k).

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