When you get dressed, do you put your jacket on first and your shirt on next? Do you put your shoes on before your socks? If you don’t get dressed in the right order, you would look pretty ridiculous. This is a silly analogy, but the message is the same for your finances as it is for your wardrobe: there are certain steps that need to be followed so that things don’t end up in a mess. In your financial life, you need to set a foundation that you can build on as life goes on. Here are some financial ducks to get in a row:
1. Protect Your Todays Before Planning Your Tomorrows
Most people take a set-it-and-forget-it mindset when it comes to insurance. We get the policies we think are a good deal, then forget about them, or we put off the insurance decision entirely until there is more money available. But not having the right insurance coverage could set you back financially if something unexpected were to happen. For example, imagine you chose an auto policy five years ago with high deductibles so you could have a lower monthly payment. Then you get into a car accident that was your fault and now you have thousands of dollars in bills to pay that will have to go on a credit card or be taken out of savings, putting you further behind in accomplishing your financial goals. Insurance exists for a reason, so make sure you have the policies that are right for your situation so you don’t kick yourself down the road.
2. Set A Budget (And Stick To It)
Regardless of your income, there’s a reason why so many financial professionals recommend following a budget. A budget helps you establish parameters for operating your household, understand if your goals are achievable in your desired timeframe, and may help reduce stress in the event of an unexpected incident, such as the loss of a job or an injury.
To start building your own budget, take a snapshot of your past financial activity. What has your spending been versus your saving? What are your necessary recurring expenses and what are other bills you could, if needed, eliminate? Then, determine how you want to divide your money. Consider starting with the 50/30/20 budget, and then tweak it to fit your situation as time goes by. In this method, 50% of your income goes towards essential living expenses, such as your mortgage, groceries, and other fixed or recurring living expenses. The next 30% goes towards personal spending, such as clothes, restaurants, or entertainment. The final 20% is allocated to savings. This amount can go into your savings account, be put towards retirement, or used to pay down debt.
Remember that your budget will change as your life changes. Don’t be afraid to be flexible, making it work for you and making adjustments so it reflects your goals and current situation. The important thing is to know where your money is going so you aren’t surprised down the road.
3. Dream Big (Or Little)
Have you ever thought about what you would do if you had a million dollars? Most of us have. But have you ever taken those dreams and mapped out what it would take to achieve them? Don’t be afraid to dream big financially, or as I’ve mentioned before, have a BHAG (big hairy audacious goal).
To avoid getting frustrated along the way, celebrate small milestones, such as paying off debt or saving a specific amount that gets you closer to your BHAG. Reevaluate your goals frequently to ensure you’re on track and make adjustments as needed. Having a goal in front of you will give you perspective in your day-to-day decisions and help you prioritize your saving and spending.
4. Planning + Investing = Progress
Anyone can close their eyes and pick a random mix of mutual funds to invest in, but having a customized savings plan based on your circumstances, goals, and risk level is what will get you from point A to point B. The golden rule is to save 15-20% of your gross income. There’s not a lot you can control when it comes to the markets and the rate of return your money will earn by the time you retire. But you can control the amount you contribute to your savings. The earlier you save and the more you save, the better retirement outlook you will have.
Here’s the math: if you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a 7% annual investment return). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65. Start by maxing out your 401(k) employer match, then choose the right savings vehicles for you, such as a Roth IRA or Traditional IRA. Whatever you do, make it a financial priority to save as much as you can. By harnessing the power of compound interest, the money you put away will grow faster due to interest building upon itself. You can make your money work smarter rather than harder to pursue your goals.
5. Check In Regularly
Your financial plan is not set in stone. As life moves along and inevitable changes and milestones occur, some change will be required. But if you don’t monitor your plan and check in on its progress, you won’t know how close you are to your goals or what you need to do to improve your strategies. Additionally, revisiting your budget, goals, and investments can serve as a simple reminder to stay on track and keep moving forward.
A financial professional can be an incredible asset as you get your financial ducks in a row, making the process less stressful, saving you time, and instilling confidence that you are on track towards achieving your dreams. Whether it’s been years since you created a financial plan or you are just getting started now, it’s the perfect time to make sure you are building a strong financial foundation. To learn more about how we may be able to help, contact us by phone at 303-945-2222 or email us at firstname.lastname@example.org.
Barry Steelman, AIF® is the Founder, Principal, Managing Partner, and Client Advocate at Private Client Wealth Advisors, a registered investment advisory firm based in Denver, Colorado. He specializes in working with individuals, families and businesses and conducting financial planning, portfolio management and retirement plan services. Along with more than two decades of experience, he is an Accredited Investment Fiduciary®, which signifies knowledge of fiduciary responsibility and the ability to implement policies and procedures that meet a defined standard of care. Learn more about Barry by visiting www.privateclientwealthadvisors.com or connecting with him on LinkedIn.