The Road Map
Many people do not have the slightest clue where to begin when it comes to personal finance and managing their money. This page will serve as a general overview, giving the necessary steps to get you on your way. There will be an article explaining each of the steps in further detail.
Step One: Build a budget, track all expenses, cut costs where possible.
Step Two: Build an emergency fund. The amount will depend on your specific situation and risk tolerance.
Step Three: Contribute as much as your employer will match to your 401(k) or retirement fund.
Step Four: Pay down high interest debt. Such as student loans
Step Five: Additional retirement savings.
Step One: Creating a Budget
Creating a budget is, without a doubt, the very first step to gain control of your money. You need to know where every dollar goes. Spend with a purpose. Many people do not plan and track their money, and as a result, live paycheck-to-paycheck.
In the beginning, maintaining a budget is a trial-and-error process. You will need to estimate how much you spend in each category, and adjust as needed. Within a couple months, you will have it dialed in. It will also be blatantly obvious where you can cut costs (spending $100 a week on restaurants? Cut that in half and pack a lunch).
To get started, you’ll want to include the items below. Your specific situation may vary, and you can add or exclude any items you’d like.
– Emergency Fund (will cover this in another post)
– Household Items
– Credit Card
– Car Payment
– Student Loan
– Gym Membership
Contact me if you would like a copy of the monthly budget that I personally use to track my expenses.
Step Two: Build an Emergency Fund
Nobody knows when an emergency will occur, and what cost impact it could have. If you suddenly lost your job, or became injured and unable to work, it is crucial to have enough money to pay essential bills. Life happens, be ready.
The size of your emergency fund could vary based on your situation. I recommend having six months of expenses, in a checking or savings account. The money needs to be accessible extremely quickly, so I personally do not suggest investing it.
Having at least six month’s worth of expenses in your fund will reduce your stress and anxiety, should an emergency pop up. If you lose your job, being able to survive for six months will allow you to find a new job that suits you, rather than accepting the first offer because bills are piling up.
Step Three: Match Employer’s Contribution to 401(k)
Once your emergency fund has been taken care of, the next step is to take full advantage of company contributions to your 401(k), or similar account.
This is essentially free money, and it would be foolish not to take advantage of it. For example, if your company matches 50% of your contributions up to 10%, you need to make sure to contribute 10%. There is no other investment out there that can guarantee a return of 50% (not even close).
A couple of additional points to consider:
401(k) contributions must be made in the form of payroll deductions
Often, you will not be completely vested in the contributions made by your employer, until a certain amount of time is spent with the company.
Step Four: Pay Down High-Interest Debts
Now that you are matching your employer’s contribution to your 401(k), the next step is to pay off any high-interest debts you may have.
Everybody has a different definition of “high-interest”. Personally, I view anything over 6% as high-interest. Considering the average annual return in the stock market is between 8-10%, I would advise paying off any debts with over 6% interest, then heading to the next step. In this step, credit cards and high-interest student loans need to be attacked with every extra dollar you have.
If your student loan falls into this category, I highly suggest you attempt to refinance at a lower rate.
Step Five: Additional Retirement Savings
Your expenses are being tracked, your emergency fund has been established, you are maximizing your employer’s 401(k) contribution, and you have no high-interest debt. What’s next? Investing and saving as much as you possibly can to meet your specific goals.
Your age and risk tolerance, as well as any specific items you want to save for, will dictate how you approach this step. If you don’t plan on touching the money for 15+ years, investing in index funds is the prudent move. If you’re saving for a down payment on a home, or anything else where you’ll need the money within a few years, it makes more sense to find a savings account, CD, or invest in bonds.
Another option in this step is to increase your contributions to your 401(k) or other tax-advantaged accounts.
Since beginning my wealth-building journey, I have read many books to educate myself. Below is a list of books that I have read, most are finance-related, some are not. Keep an eye on my blog, as I will be regularly posting book reviews, letting you know the benefits of each book, and if it is worth your valuable time.
Dave Ramsey’s Complete Guide to Money
I Will Teach You to be Rich – Ramit Sethi
The Millionaire Next Door – Thomas J Stanley & William D Danko
A Random Walk Down Wall Street – Burton G. Malkiel
Buffett: The Making of an American Capitalist – Roger Lowenstein
One Up On Wall Street – Peter Lynch
The Intelligent Investor – Benjamin Graham
Extreme Ownership – Jocko Willink & Leif Babin
The Power of Habit – Charles Duhigg
The 7 Habits of Highly Effective People – Stephen R. Covey