When we set out on a journey, it is natural to want a guide, a map, or a GPS to tell us where to go. Especially if we have never been to our destination before, that is no different for our financial security and freedom journey. I have created a simple yet helpful financial roadmap to help you find your way. Better yet, I volunteer to guide you along the way, so you are never far off course again!
Although I will admit that all of us will have a different financial journey, there is never a one-size-fits-all. However, I can lay out an order of priorities using this roadmap to show you what is most important for your focus before working on other areas of personal finance.
Let’s get started.
Focus 1 Spend within your means.
Start at the beginning. If you are going further into debt each month, it is time to make some changes. Stop using your credit cards if the balance is not paid off in full each month. Reduce any spending you can. Focus on reducing some debt to give you more margin. Sell some things to pay off a bill. Start a side hustle to get you to the point you can pay all your bills each month.
Focus 2 Spend less than you make.
Once you can keep your bills and spending within the boundaries of what you make, the next step is to spend less. There needs to be slack in your spending plan to allow money to be set aside for expenses that will come.
If you are not saving money, work to reduce costs further or increase your income to build savings. Finding a way to have extra to save is the only way your current situation will ever change.
Focus 3 Add to your emergency savings and IRA.
Now that you have created some margin between what you make and what you spend, it is time to build your primary savings. It is critical to have cash emergency savings. Having an established emergency fund is only slightly more important than beginning to save in your IRA (Individual Retirement Account) for the far future.
I believe it is vital to build habits for both types of savings. Everyone who is not retired needs to be saving for retirement in their IRA.
If you do not have a minimum met in your emergency fund, then your percentage of the surplus going to emergency savings will be larger than the percentage going to your IRA. If, on the other hand, you have fully funded your emergency fund, you may not be adding any to it, but you will be adding much more to your IRA.
I recommend making your emergency fund a top priority until you have at least enough cash to cover your insurance deductibles
The amounts and percentage of the surplus going to each of these accounts will vary for everyone, but they are both very high priorities for everyone’s journey to financial freedom.
Focus 4 Pay off high-interest debt.
The next thing you want to tackle is high-interest debt.
You will first need to understand what “high” interest is. Target anything over 10% interest immediately. In today’s market (2021), anything over 6% is high interest because loan rates are exceptionally low.
First, target aggressively any credit card debt because it is on average between 18-29% interest! If you don’t find extra to pay those debts, they can last you forever, paying each purchase several times over before paying them off.
Next, check for double-digit lines of credit or personal loans.
Also, target car loans at a double-digit interest rate to lower the balance and make it easier to refinance. Work on improving your credit score and then apply for a refinance to bring the interest down ASAP.
I wouldn’t suggest work on paying down (faster than the minimum payment) mortgages or car loans that are low interest at this point, and maybe never depending on your other financial goals.
Focus 5 Increase emergency funds and pay off other unsecured debt.
Once you have paid off that high-interest debt, you can begin adding more to your emergency fund until you get to the maximum you have set for yourself.
Now, some of you might be wondering about the word maximum. Yes. I think it is important to limit how much you keep in your emergency fund too. Your money doesn’t grow there, so keep only what you need for emergencies or other short-term goals in basic savings accounts.
How much you keep will depend on your possible emergencies. Although we can’t account for everything, we can develop an idea of the types of emergencies we may encounter. Your need could range from a couple thousand to 3-6 months of living expenses. Decide your limit and once you meet it, pull back on saving any further in your emergency fund.
Divert your money moving forward to where it will work harder for you. Until the time comes that an emergency comes up and you remove some money from your account. You can then increase what you are putting in it again to bring it back up to your limit.
If you have other high enough debt to pay down faster than the minimum payment, now is the time to focus on getting rid of it as well.
Focus 6 Increase and vary your savings according to your goals
After you have gotten rid of any of the pesky debt holding you back, continue to build and diversify your savings.
You will want to define your goals and the timelines for each plan clearly, so you know where to put the money for each plan. Maximize the amount of interest you can earn for each timeline by choosing an appropriate account and risk level.
Focus 7 Increase investing
Aim to reach the maximums the IRS allows in your 401Ks and your outside IRAs.
Also, be sure you are using some investing strategies for your medium and long-term goals to get the most growth out of every dollar you have earned.
Focus 8 Maintain, adjust and build wealth
Once you have your systems in place, you have established your emergency savings and investments. Continue to maintain and adjust as you reach goals or things in life change.
Always focus on maximizing your dollar and building wealth to set you up for retirement. The big end game where you get to stop working and enjoy the rest of your life.
The steps to financial freedom do not need to be complex
Focus on one thing at a time, and you will start to see your finances improve. If you want specific help with any of these guidelines, check out my coaching services, where you can get the help you need for your situation.