Summary/TLDR
Before you can seriously address long term goals, you must first master the basics. This would include a budget which prioritizes saving and is regularly tracked, eliminating bad debt, and having sufficient emergency reserves and insurance. Getting ahead of yourself by investing, planning for retirement, taxes, or your estate before building a strong financial foundation is bound to backfire.
Introduction
When seeking to get their finances in order, many find themselves overwhelmed by the process, not knowing where to start. The goal of this piece is to help you set and prioritize objectives when it comes to sorting out your finances.
You’ll notice that I will not discuss any “flashy” topics here – no talk of investments, retirement planning, taxes, etc. These are areas which can only be properly addressed after a strong financial foundation has been established. And there’s no way to lay a strong foundation without a discussion around the fundamentals – and that’s where we’ll be focusing.
Get A Grip on Your Cash Flow – Make a Budget
This is where you start! You cannot properly plan anything until you understand your cash flow. You must have a budget. Period.
Reverse budgeting – Budgeting 2.0
Traditional budgeting starts with income, subtracts expenses, and deems the remainder as savings. Flip this! Begin with income, address obligatory expenses, prioritize savings, and then plan for discretionary costs. A budget structured this way prioritizes your cash flow appropriately.
Regularly review your expenses to ensure you’re sticking to your budget at least 80% of the time. Start by listing out every cash flow item (income, saving, expenses, debts) that you have that you can think of in an excel spreadsheet (you won’t think of everything – that’s ok). Then look into a popular budgeting app such as You Need A Budget or Ever Dollar and move what you started with in excel to that software. Track your spending for the first couple of months and refine your “rough draft” by adding in spending/saving categories you may have overlooked. You’ll begin to get a feel for “how” to budget and properly track your expenses over the first few months.
Finally, make it a habit! Dedicate time once per week or bi-weekly to categorize all of your transactions. For example, I do mine every Sunday. It takes me anywhere from 10-20 minutes.
Eliminate Debt
Tackle debts with interest rates above 5% immediately, except for your mortgage. Begin with your highest interest rate loans. For every loan that you pay off, redirect its payments towards the loan with the next highest rate. Generally, debt elimination should be prioritized over saving.
Student Loans
Private loans should be targeted for elimination. Federal loans have more repayment options, full or partial interest subsidies, and – depending on your profession – opportunities for forgiveness. If you have federal student loans, I recommend consulting with a Certified Student Loan Professional (CSLP) to chart the best course of attack.
Protect Yourself, Your Family, And Your Assets – Prepare For The Unexpected
Saving without a protection plan will backfire. Imagine diligently saving for a downpayment on a house and then getting slapped with an emergency medical bill, home repair, or car trouble. Failing to plan for the unexpected is a huge reason that so many people are behind on their goals.
Emergency Funds
If you are a dual income household, you need at least 3 months of expenses (you should know how much this is after completing your budget) in an emergency fund. Single income households should have at least 6 months of expenses. If you are in a high turnover field or experience wide swings in your income, you should have at least 6 months’ worth of expenses. Finally, business owners are often best with 6-12 months of expenses.
Keep your emergency fund in a high yield savings account, separate from your checking account. Popular options include Wealthfront, Sofi, and Betterment. Finally, don’t save more than is necessary.
Insurance
Here’s a breakdown of the most important policies:
Long term disability insurance – almost everyone needs this. Employer coverage might not be enough.
Life insurance – essential for married couples and those with young children. Employer coverage is almost certainly insufficient. Buy term insurance.
Property & casualty insurance – auto, homeowner’s (if you own), and renter’s (if you rent) are the most common.
Umbrella liability insurance – Often overlooked but becomes essential once your net worth crosses $500,000.
Conclusion
Mastering the essentials is the foundation of any robust financial journey. It’s easy to get ahead of oneself but remember: building on a shaky foundation only invites disaster. Engaging a competent financial professional can offer valuable perspective, helping you prioritize and navigate both the fundamentals and the intricacies of personal finance.
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