When I was talking to journalist Cameron Huddleston recently, we discussed retirement questions everyone needs to be able to answer. That resulted in the article, “21 Questions to Ask Yourself Before Trying to Retire,” and a second article, “8 Ways to Stop Worrying About Money.” This reminded me to finish this article I started to write several months ago.
For this article, the goal is to help people at four different stages of their life make better financial decisions and to try to take away some of the money worries we all have. It will be broken down into four parts for easy reading. The stages are foundational and goal-oriented—each level builds on the previous one. This guide will address each of these foundations. Don’t worry if you missed the age, just start with the beginning and work toward the end to get back on track. Through this process, my goal is to help you get your financial house in order, help you have less stress and be in a place to start targeting and achieving financial goals.
Building the Foundation: Knowledge Is Power (Age 20 to 30)
Everybody worries about financial decisions, indecision or consequences. When you don’t have good information (or good resources for answers), it can lead to even more stress or mistakes. Therefore, before you can stop worrying, you need to know where you stand (financially). A great way to do that and get started is by getting an accurate snapshot of your current situation. To save money, try these things before meeting with or hiring a CPA or financial advisor.
1. Manage Your Budget
You need to know where your money is going before you can start saving for any goal or retirement. There many ways to track and control spending.
- Mint.com: Have your credit card, banking and other information compiled in one place so you can track where your money and paycheck are going. Great online resource to categorize your expenses; you can even create a budget once you get a handle on the money. (For related reading, see: 4 Best Personal Finance Apps for 2017.)
- Quicken: With this software, especially if you don’t like everything online, you can track all of your expenses and can even link it (like with mint.com) to your bank and credit card accounts. This is another way to track spending and see where your money is going.
- Cash Allowance: Start giving yourself a firm allowance of cash to spend. Stop spending frivolously over your allowance amount (depending on your level, $50 to $100 a week). Once that allowance is gone, no more Starbucks, movies, etc. Think of it as a financial diet and see how much you can resist daily splurging or cheating by putting these unplanned budget leaks on a credit card.
- Note: One thing of importance in this area is to see what spending is fixed (rent, food, mortgage, taxes, etc.) and what is discretionary (cable, eating out, vacations, etc.). You will use this quite a bit in #4 below.
2. Control Your Credit
Get a handle on your credit and FICO score. You can get this information by calling a credit bureau like Equifax or through online resources like MyFICO or Experian. You need to check for errors, unneeded credit lines and/or things you can fix to better your credit. Some have tools that show how you can increase your score by doing things like paying down lines of credit, etc. (For related reading, see: Credit Repair: How to Improve Your Credit Score.)
3. Determine Your Debt
Create a list of your debt amounts, minimum payments and interest rates. It is important to see how much this debt (including student debt) is costing you and draining your cash, especially for high, non-deductible interest accounts. At this point, it is good to follow the recommendations in #1 to stop the debt bleed. No more spending money that you can’t pay off at the end of the month (debt spiral). This can be done in a simple spreadsheet so you can see it all on one page.
4. Prioritize Spending, Pay off Debt, Set Goals
At this point, it is important to determine your goals so you can de-stress and make better and informed money decisions.
What spending is needed and what is frivolous (or discretionary)? Consider cutting back on expenses that are unnecessary and re-deploying cash in other areas. Please take this into account before making major purchases like new cars, new TVs, vacations or a nicer apartment.
If you look at your net paycheck (after taxes, benefits, etc.), and deduct your fixed expenses, the balance is your discretionary income. Depending on what you find in #2 or #3 above, you may want to decrease discretionary spending and focus your discretionary income on one of these areas:
- Paying off higher-interest debt
- Setting up a rainy day fund (three to six months fixed expenses)
- Funding your employer plan (401(k) or the like) up to the match if not doing so already, or funding an IRA (or Roth IRA if eligible).
- Saving for important items like a house, more reliable (not necessarily new) car, wedding, etc.
Make sure you take advantage of employer benefits such as life insurance, disability insurance and health insurance (risk management). It is a mistake to “save money” by not having insurance.
When you get Part 1 completed…congratulations! Now you are ready to move onto Part 2. Stay tuned for my next article.
(For more from this author, see: Retirement Planning: What's Your Hurdle Rate?)