As a financial coach, I often get asked questions such as “Where do I start?” What should I focus on? What are my next best financial moves? With all the advice and the plethora of opinions out there, it’s no wonder we are often left overwhelmed, confused, or even worse…frozen. Here are some of the top suggestions I give that have helped many of the individuals I’ve spoken with, based on the 3 general stages of their financial life.
The Foundation: Just Getting Started
Whether you are just getting started on your financial journey or hitting the financial reset button, these are the first steps you should take with your money:
1) Establish $2-3k in emergency savings. Start by reviewing your spending using an expense tracker, app, or just a pen and paper, and make sure you have enough left over to allow you to save. If not, check out these simple ways to save money. Next, set up a separate emergency savings account (check out sites like Bankrate or DepositAccounts for options) and automate your savings to get you there as fast as possible.
2) Take the free money by contributing enough to get your employer’s retirement savings match. Think of the employer matching percentage as virtually a guaranteed return on your money.
3) Prioritize paying off high interest rate debt while continuing to drip savings into your emergency savings account. Any debt above 6% interest is worth paying off early. Use this debt blaster as an easy way to get organized and help you focus on paying the highest interest rate debt first. If you have a lot of debts, consider knocking the smallest balances out first to give you some quick wins and then focus on the highest interest rate debts. Whenever you get some extra money, consider dropping some of that in there as well.
Be as creative with these approaches as you need so that you make progress, stay motivated and most importantly stay on track. Lastly, set the extra payments on automatic. Automating is the key to financially hacking ourselves into a better financial life!
4) Once you save 3-6 months of expenses in your emergency savings account and have a good handle on your debt payoff strategy, focus on making sure you are on track for a baseline retirement. Use a retirement calculator like this one or one that is offered by your current broker or retirement plan provider to get an idea of how much you have to save to get to that target date. If you can’t commit to large contributions right now, using the auto-escalation feature in your retirement savings plan or automating small increases towards your retirement savings every year can help you close the gap. Read more about the power of doing that here.
Beyond The Foundation
Beyond the foundational items, we all have various goals that are important to us. For some, it may be a first-time home purchase, getting married, or preparing to start a family – maybe it’s all 3 at the same time! Here’s how to prioritize in those instances and some strategies to help you stay on track:
1) List the financial priorities that matter most to you and some general idea of what you need to save to get there. For a home, that could be 20% of the value for the down payment. Starting a family could be $5-10k to help pay for maternity costs and baby prep. For a wedding, it could be somewhere in the middle of those. My colleague Erik Carter offers more ways to think about the priorities here.
2) Use a calculator like this to illustrate how long it might take to save that total amount needed.
3) Next, prioritize those goals based on their importance. If you don’t have enough time or savings to reach them, you’ll want to discuss making some trade-offs. This may involve doing more with less (i.e., a wedding), extending the timeline (i.e., a home purchase), or putting a goal on pause until a later date (i.e., buying a second property).
Optimization
At this stage, you have your fundamentals in place and have put in the work and time to go beyond your foundation and still have more resources available to try to take your finances and your goals to the next level. Here’s how to navigate that based on your tolerance for taking risks:
Conservative Risk Tolerance: If you plan on living in your home for the rest of your life or at least the very long term, consider paying down your mortgage. Think of the extra payments as earning you a guaranteed return on your money based on what your mortgage rate is. For many of us, it is between 3-6%.
Moderate Risk Tolerance: With a more moderate risk tolerance, perhaps you look at focusing on getting to your financial goals faster. Based on the additional amount you can save, update the time horizon for each goal and determine the most appropriate way to invest for that timeline. If you are looking at wealth building, perhaps you can start looking at investment real estate or alternative investment vehicles that can help you protect and grow your wealth.
Aggressive Risk Tolerance: With a more aggressive risk tolerance and after considering the above options, perhaps you take a slice of your savings/additional income and look at opportunities to supercharge your returns with more aggressive investments such as hedge funds, private equity or asset class, business or industry-specific investments. Think of this slice of money as a satellite investment. You don’t bet the nest egg with aggressive opportunistic approaches. Instead, you use a slice to help propel your wealth and returns while ensuring that your core next egg is not put at significant risk. Please note that these strategies are traditionally for more experienced and sophisticated investors, so be sure to seek the advice of a qualified investment professional that you trust to help explore these options further.
Summing It All Up
Once you get your foundation in place, focus time on making your other priorities personal so that you can build a financial life that is most meaningful for you. Once this is established and you have more room to grow, look to optimize based on your individual situation and risk tolerance. Just don’t forget estate planning, which will help you protect all these efforts for you and your family to ensure a legacy of financial wellness. If your situation is more nuanced or needs extra attention, don’t hesitate to get help from a qualified and unbiased financial planner to see what makes sense for you no matter where you are in your financial life. Your employer may even offer free access to one through a workplace financial wellness program.
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