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Prioritizing your finances, step-by-step -- Page 2

Step 4: Fully fund your pretax retirement savings.
Stash 15 percent of your gross household income into a retirement plan or Roth IRA if you're eligible. If you can't afford the full 15 percent, start slowly and add 1 percent to 2 percent at a time, as you are able.

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A reminder: If you're already saving the maximum amount in your retirement fund, but still have non-mortgage debt (Step 2) or haven't created your emergency fund (Step 3), you're not ready for Step 4.

Financial experts emphasize that you must take care of your current financial situation before you can plan for the future. Cut back or eliminate your retirement contributions until you have completed Steps 1 through 3.

And why focus on retirement before college savings? "Millions of baby boomers are learning the hard way that they can't afford to retire because they didn't save enough soon enough," says A. Todd Black, a fee-only financial planner in Cumming, Ga. "If you put off saving for retirement until education expenses are paid for, it could be too late for you to save and still have the retirement options you were hoping for."

Also, says Black, remember that your kids can take out loans for college. You can't take out loans for retirement.

Step 5: Create a college fund for your kids.
Once you've established an ongoing contribution to your retirement fund, this is the time to set up a college fund for your children -- if that's important to you.

"I know some fabulously successful people whose parents didn't pay for their education," says Black. "I also know some less successful ones whose parents did, so it's not the end of the world if you can't afford to save for college."

Step 6: Pay off your mortgage early.
It's finally time to burn that mortgage note! Many financial experts suggest that their clients pay off their houses before they retire, if possible.

Some ideas: Refinance from a 30-year to a 15-year mortgage, arrange for additional principal to be automatically withdrawn each month from your bank account or use windfalls such as bonuses or inheritances to pay off large chunks of your mortgage.

Step 7: Build wealth and enjoy your financial independence.
Once you're debt-free and solidly on the road to retirement, it's time to have some fun. Buy that sports car you've always wanted, invest money so you can leave a legacy for your grandchildren or use your financial freedom to support causes that interest you.

It's all a matter of priorities.

Teri Cettina is a freelance writer based in Oregon.


-- Updated: April 20, 2005:




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