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Planning Basics in 5 Steps

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Over the next few weeks, our blog will include some guidance on the fundamentals of financial planning. It will not replace a financial plan since the information will be generalized; however, it should help provide some guidance for you.

Let’s start with some basics:   

Step 1: Build Your Emergency Fund

This should be in a distinct account; don’t commingle your emergency funds with your checking account.

Baby steps, start by saving 1x your monthly gross income.

  • Find your most recent paystub and locate your gross pay at the top (before taxes and any deductions that are taken out).

Goal is to have 3x-6x your monthly gross income.

  • This won’t happen overnight, but you need to make this a priority!
  • Single=3x
  • Married (or Single with Kids)= 4-5x
  • Married with Kids= 6x

Step 2: Eliminate Debt

Credit cards should always be at a $0 balance each month.

  • Make sure you can pay these off each month. If these balances are out of control and you can’t pay them off each month, you are most likely living outside of your means (Sorry, the truth hurts sometimes).

Cars should be paid off in 3 years.

  • If you can’t pay it off within 3 years, you bought a car you can’t afford (Sorry again, but someone needs to be honest with you. The car salesmen that just locked you in for 72 months of payments doesn’t care about your financial wellness, he cared about his commission).

Mortgages and student loans are a little different, we will touch on these later. 

Step 3: Employer Benefits

Invest whatever amount is necessary to get the FULL match on your 401k, it is FREE money!

  • Never take a loan from your 401k.

Take advantage of any employer benefits programs.

  • Life Insurance, Disability Insurance, Heath Savings Accounts (HSA). 

Step 4: Budgets are Boring, but Vital to Your Success

For now leave it at this, build a budget and try your best to follow it. It takes about 3-4 months on average to adjust to a new budget. We will have more details on this when we hit cash flow on the next blog. 

Step 5: Saving 15-20% of Your Income

Follow this plan of attack to get to 15-20%

  • Take the full employer match first
  • Then max-out your Roth IRA
  • Then back to your 401k (if they offer a Roth 401k, use that!)

Example: You save 4% of your salary and your employer match is 4% (also known as 100% match up to 4%). Next, you max out your Roth IRA, which is 8% of your gross income (example: $5,500 Roth contribution with a gross income of $68,750), which puts you at 12%. Now, take the extra 8% and invest it into your 401k or Roth 401k (if available). Boom, you’re at 20%. Notice that I don’t count your 401k match towards your saving %, not going to let you off that easy.

And there you have it, 5 basic steps to help build a solid financial foundation. Heck, if you were able to follow just those 5 items, you would be looking pretty good financially!

Remember that wealth building is a marathon, not a sprint. The Tortious wins the race every time you read The Tortoise and the Hare.

Next week on the docket, we have cash flow. From businesses to individuals, cash flow is king!

Questions and comments can always be emailed to us. We also offer one Monday per month to “Ask Chad” any questions for FREE! That would be a great time to ask any specifics on the items above or any other questions you have!