Create a financial plan
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If you don’t know where you are going, you’ll end up somewhere else.
-Yogi Berra
Once when hiking in a wilderness area, a tired and weary hiker approached me and asked directions to the trailhead. I pulled out my hike book and showed him the trail map. Quickly he identified the route back to his car. He thanked me, and with new energy he hiked off. I felt a great sense of satisfaction helping the hiker get back on course. I then thought, “How could he have gotten lost, there are only two turns that he had to make?” Later that day as I headed back toward the trailhead it became evident how the hiker missed a key turn. The path to the trailhead was so faint and the main trail was so dominant, you would have guessed it was a game trail. My thought at that point was, “Who would walk in the wilderness without a map?”
Do you have a financial plan? A clear map to help navigate you to retirement security and financial independance? I have created the following financial steps to to guide you through the finanical wilderness.
A complimentary PDF version of this test is posted at book resources
1. Define your goals
Write down your dreams. Identify, clarify, and prioritize your goals. For each goal track the next actoin step that you can complete. Keep your goals visible and review your goals weekly.
2. Live within your means
Pay as you go! Spend less than you make every month. Maintain a balanced checkbook, put your credit cards on sabbatical, eliminate impulse purchases, save up for large purchases, detail your monthly cash flow, and reduce fixed and variable expenses. Achieving your goals is the motivation to reduce your spending.
3. Create and emergency fund
Create an emergency fund that is one-quarter of your montly living expenses, then gradually increase to a full month of living expenses. Only use the money for true emergencies such as medical expenses and car repairs.
4. Eliminate high interest debt
Eliminate all credit card and consumer (i.e. auto loans, student loans, etc) with greater than or equal to 6% interest. Attack outstanding loans with the highest interest rates and lowest remaining balances first.
5. Contribute 10% to retirement savings
Save 10% of your salary for retirement. Use automatic deductions and payments to contribute to your 401k/403b or a Roth IRA. If you can’t immediately save 10% of your income then take advantage of any matching available from your employer in your retirement plan. Increase your contributions both when you achieve pay increases and when you eliminate debt. Commit to save for the long haul. When changing jobs, roll your retirement plan to an IRA - avoid the temptation to cash out the money.
6. Pay off credit card and consumer debt
Attack and prepay all debt greater than 4% interest. Debts lower than 4% interest rates can be paid on the regular schedule. Do not incur any new consumber debt (i.e. auto loans, home equity lines of credit, etc). If you use credit cards then pay off the balance every month.
7. Fully fund your rainy day fund
Be prepared for the loss of a job or a serious medical event. Rainy day reserves help make lifes difficult transitions manageable. If you’re under 30 years old, save 3 months worth of living expenses. If you are between 30 to 40 then save 6 months of living expense. Above 40, accumulate 12 months of living expense.
8. Maximize retirement savings contributions
Fully contribute to your 401k/403B plans and Roth/traditional IRAs. Continue increasing your contributions until you reach 15% of your income. Either invest in index funds to keep expenses low and achieve market performance or invest in no-load mutual funds that outperform index funds.
9. Continuously build equity and then pay off your mortgage
Purchase a home with 30% down and fixed 15 or 30 year morgage. Do not take out home equity line loans. Pay off your mortgage to reduce your living expenses and achieve peace of mind.
10. Achieve retirement security / financial independence
Financial independence is the point at which your assets provide the necessary income to cover your expenses. You are now in the position to pursue your passions full time. You also can increase your giving.
Follow your dreams, Achieve your goals
How is your journey going? What step number are you on?
