Financial Planning Basics in 5 Steps

Ready to start accumulating wealth? Start with five simple steps to build a solid financial foundation. They will not replace a financial plan, since this information is generalized but it should help provide some guidance for you. Let’s start with the basics. 

Step 1: Build an Emergency Fund

This should be in a distinct account. Don’t commingle your emergency funds with your checking account. (For related reading, see: How to Build an Emergency Fund.)

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

  • Find your most recent pay stub and locate your gross pay at the top.
  • Be sure to save the total amount before taxes and any deductions are taken out.

Your goal is to have 3x to 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) = 4x to 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 your 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. (For more, see: 4 Keystone Money Habits to Establish.)

Cars should be paid off in three years.

  • If you can’t pay it off within three 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 and can be maintained going forward. 

Step 3: Employer Benefits

Invest whatever amount is necessary to get the full match on your 401(k). It is free money.

Take advantage of any employer benefits programs.

Step 4: Build a Budget

Budgets are boring, but they are vital to your success. For now leave it at this. Build a budget and try your best to follow it. It takes about three to four months on average to adjust to a new budget. (For related reading, see: 5 Financial Planning Decisions You Won't Regret.)

Step 5: Save 15% to 20% of Income

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

  • Take the full employer match first.
  • Then max out your Roth IRA contribution.
  • Then contribute more to your 401(k). If they offer a Roth 401(k) 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 401(k) or Roth 401(k), if available. Boom, you’re at 20%. Notice that I don’t count your 401(k) match towards your saving percentage–not going to let you off that easy.

And there you have it, five basic steps to help build a solid financial foundation. Heck, if you were able to follow just those five items, you would be looking pretty good financially. Remember that wealth building is a marathon not a sprint. The tortoise wins the race every time. (For related reading, see: 5 Financial Strategies to Last a Lifetime.)

Registered Representative offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Advisory Services and Financial Planning offered through Vicus Capital, Inc., a Federally Registered Investment Advisor.