How should you balance your different financial goals? Should you save for retirement before your credit cards are paid off? How about student loans? I thought it might help to talk about the steps to reach financial independence.
Want to accelerate your progress through these steps??? Calculate your net worth regularly and track your spending. And to stay on track with these steps, you have to figure out your why. Otherwise, it will be way to easy to start chasing the next shiny object rather than keeping your eye on the prize that matters most to you.
Ok here they are, Ms. Liz’s steps to a Kick A$$ Life:
- Establish an emergency fund of $1,000. Stuff happens, if you’re not prepared, it will knock you off your steps. I’d cut out all non essential spending (I’m talking to you–dining out, memberships, cable TV) until you have your emergency fund. Put it in a separate account–or better yet, a separate bank so it is difficult to access.
- Pay off your credit cards and other high interest consumer debt (appliances, furniture etc.). If the interest rate is 6% or more, pay it off. You can do this in two ways–debt snowball or debt avalanche. The debt avalanche pays off the highest interest rates first, debt snowball pays off the lowest balance first. Both work–debt snowball may make it easier to stay motivated, debt avalanche results in lower total interest costs.
- Contribute to your retirement plan up to the company match. Your employer’s retirement match is free money! And it’s even better than most people realize. So as soon as you get out from under high interest debt, you want to take advantage of it. If you tell me you can’t afford to contribute to retirement, I’ll say you can’t afford not to. If you tell me you’re too young, I’ll tell you it will never be easier. Just do it, future you will be so grateful!
- Increase your emergency fund to at least three months of essential expenses. Take your bare bones monthly expenses–rent, heat, light, minimum debt payments, and groceries X 3. Add this amount to your emergency fund established in #1 above.
- Pay off any remaining consumer debt not paid off in #2 above. Use the same method (debt snowball or debt avalanche) if that worked well for you or try the other method if it didn’t.
- Pay off car loans using either the debt snowball or debt avalanche.
- Increase your retirement contributions to the desired level. If you’re contributing to a traditional retirement plan, this chart shows how many years you’ll need to work at different contribution levels. If you’re contributing to a Roth retirement plan, this chart shows how many years you’ll need to work at different contribution levels. These charts are a bit sobering–If you contribute 5% to a traditional account, you’ll need to work 71 years to retire or 61 years if you will receive social security–YIKES! You’d better get started now!
- Save for your next car, house or other large purchase. You’ve worked really hard to get to this step, you’re debt free other than student loans and your mortgage. Congratulations! But you don’t want to go backwards so must save for large purchases you want to make. Keep this money separate from your emergency and operating funds.
- Pay off your student loans. If you have student loans, work really hard to make them go away. Use the debt snowball or debt avalanche.
- Save for your children’s education. You may be surprised this is so far down the list but there’s a very good reason. No one will loan you money for your retirement. There are many options for students to fund their education–you have to put your future first. As much as I bitch about wearing tough skins as a kid, I’m super grateful my parents looked after their own future so I don’t have to.
- Pay off your mortgage??? With current interest rates extremely low, it probably doesn’t make financial sense to pay off your mortgage. But, if owning your home is important to you–if it will help you sleep at night, you may want to pay off your home. Mr. Ms. Liz and I chose to do this and we are happy to really own our home.
- Invest, invest, invest. If you’ve made it to this step, you’re truly kicking A$$! Keep saving as if you were working on the earlier steps and invest. Figure out the level of risk you are comfortable with and educate yourself on investing. Here’s a helpful article to get you started. Utilize tax advantaged investments (401k’s, IRA’s, HSA’s) to the extent they are available to you.
If you’re making progress through these steps and something knocks you off the step, back up to an earlier step and get started again.
If this seems daunting or scary, go back to your why. Why do you want to improve your financial life? What do you dream about? Do you want more options with your work? Are your commute, a co-worker or a customer stealing your sanity one morsel at a time? Do you want to save for a trip of a lifetime? Do you want to reduce the worry and stress in your life? Whatever it is, put that why front and center. If it is truly the most important thing to you, a few steps aren’t going to keep you from achieving it. People without your special talents have done it and you can too!
Start small–just one step before thinking about the next one. Make reminders of your goals. I read about a man who kept a picture of his family in his wallet next to the cash so each time he was making a purchase, he weighed it against his goal of spending time with his family.
Let me know in the comments where you are in your steps, are there any I should add? Any that need additional detail? Thanks for reading!