When you're starting with your money, it's essential to get a grasp on everything at a basic level. A financial plan is complex since everyone has different income structures, backgrounds, and values. But when you're starting, tackling a couple of these items will already set you miles ahead of the crowd. So here they are:
56% of households don't have enough savings to cover a $1,000 expense. One of the best things every household could do is simply keep a short-term reserve on the side that they can tap into for unexpected expenses like accidents, medical bills, job loss, and more unfortunate events. When the going gets rough, you'll need an e-fund to access so you don't either tap into your long-term funds o take out high interest debt to pay for the bills. This also leads to the second point.
What good is taking advantage of compounding interest if someone is using to take advantage of you? While you love using it for investments, banks love using it for debt. High interest debt like credit cards remains at an all-time high. If it's taking control of where your cash flow is going and out of your control, this is an area worth focusing on. When managing finances, tackling this puts you ahead of most people and releases enough cash flow to build on your wealth. You don't necessarily have to choose to tackle debt or invest first. Many times it makes sense to battle on both. However, if you're in a position where it's out of your control, this MUST be a top priority.
I've already mentioned cash flow a couple of times here. Your personal cash flow really boils down to 5 variables: gross income, taxes, essential expenses, discretionary expenses, and savings. By outlining them, you can see where this flows from here. Knowing how to distribute your net income (income after taxes) amongst your finances helps. Identifying where this goes from here provides clarity on where your finances are being held. But what if you're starting out and don't really know where to begin? Try the 50/30/20 rule: 50% essential expenses, 30% discretionary expenses, and 20% savings. Everyone's situation will be different and this allocation will look different to each individual over time, but having basic roadmap gives direction for the flow of money.
I don't consider a 401k to be the "holy grail" of investment or the main reason why you will be able to be financially independent. However, it's still a practical vehicle and has always been made as a supplemental one. Whether you like it or not, one component most people agree should not be slept on: the match. This is when the employer decides to make their own contribution to your plan. Typically, to receive the match there is a contribution requirement from the employee. As part of retaining employees, there are vesting schedules with these matches. Most vesting schedules have a 2-6 year grading schedule where 20% of the match is vested after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years, and 100% after 6 years. But some plans may offer different schedules so it's good to check with your employee benefit packet. But you can view this match almost as "free money" since this contribution does not come out of your paycheck. Not everyone needs to max out their 401k, but it's generally good practice to contribute the minimum to receive the full match. This ensures the maximum match amount is paid out relative to the amount the employee contributes.
One of the most underrated benefits of working with an employer comes from the insurance coverage that's offered. These include health, dental, medical, life, and disability. Purchasing each of these individually usually come at a high premium, especially when you are older and unhealthy. As group policies, they provide deep discounts for employees. Even though some may be a couple of dollars that may never even be claimed, the ability to transfer any level of risk for a deep discount should not be overlooked. Many of these policies might not even require any medical underwriting so they are much easier to acquire. They aren't replacement to individual policies, but they provide affordable coverage and can supplement costs from individual policies.
One of the most challenging steps of the entire financial planning process usually occurs initially. Like many things in life, just taking action is usually where most of the hardship comes into play. The great thing about personal finances in 2023 is that it's straightforward to automate much of the technical work behind the scenes. These include:
It's not a bulletproof method, but knowing you can take these tasks off your plate is great. Getting this out of the way lets you focus on the bigger goal with your money.
Finally, one of the best ways investors can start out strong is with a schedule to stick by. Everyone operates differently, but sticking to a frequency is good to ensure a bare minimum of accountability. Some examples of methods doing so are as follows:
Putting together a financial plan keeps you accountable and monitors your progress over time. Ready to take your finances to the next level? Schedule a call so we can kick-start your plan.
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