My 27 year-old daughter, Heather, is embarking on a career change – the perfect time for a financial check in. Like many of today’s millennials, Heather didn’t receive a formal financial planning education, so we started with the basics. Heather’s a runner, and I’m a fan of metaphors, so we started the financial conversation using the same approach Heather would use when mapping out a training plan for an upcoming race.
Dream it, map it, make a plan, and stick to it.
The dreaming part is easy. Chasing down the dream and achieving it can be a bit more of a challenge. If you’ve never run a step in your life and your dream is to run a marathon, it’s easy to become overwhelmed and call it quits before you even get started. The solution?
Break it down, make a plan, commit to chipping away at it, and gear up to get closer to your goal.
The same goes for organizing your financial life. It can feel overwhelming at first, but it doesn’t have to be. I brought it back to basics for Heather and created a five step fiscal training plan:
1. Think about the future. Considering where you want to be down the road can help you make good choices today. Write down some of your goals so that you have something to work toward. It doesn’t have to be complicated. Maybe it’s buying your first home, or starting your own business. Have fun imagining what your future life could look like.
2. Track your spending. You are likely wasting a lot of money if you’re not tracking where your hard earned dollars are going. One of your greatest strengths is your technology savvy – use it to your advantage! Mint and Level Money are two good budget apps. Once you get a handle on your income and expenses, you can start saving or increase your current savings level. It’s quite an eye opening exercise and you’ll likely be surprised by what you learn.
3. Review your debts. Running balances on credit cards can derail the best of budgeting intentions. Paying off “bad debt” such as credit cards and personal loans with high interest rates should be a priority. If you have college loans, check the interest rates and work on chipping down the balances by prioritizing those with the highest interest rates. A note about credit cards: you likely get bombarded with credit card offers. Establishing credit is important, but start with just one card that offers no annual fee and pay it off each month. Two good sources for finding a good credit card deal are creditcards.com and cardratings.com.
4. Set up a rainy day fund. Also known as an emergency fund, set aside cash that covers at least three months of expenses. Setbacks happen, and you never know when a job loss or emergency may come your way. Being prepared will help you get through it with the least amount of pain.
5. Invest. The sooner you begin the better. Contribute to your company 401(k) plan. If money’s tight, at the very least take advantage of the company match. By investing even small amounts, you will establish the discipline of regular saving. The compounding effect of investment returns over a very long time horizon is powerful. You may want to try one of the online retirement savings calculators to illustrate this point.And don’t worry if you’re new to investing; many 401(k) plans offer a diversified target-date retirement fund that matches your investments to your retirement date. If your employer doesn’t offer a retirement plan, and if your earnings and marginal tax rate are relatively low, consider a Roth IRA. There’s no pre-tax benefit here but you get something even better – no tax on the gains upon withdrawal. Fidelity, Schwab, and Vanguard (among others) offer low-cost investments and accounts that are easy to set up and fund.
As with many things in life, personal financial planning takes discipline and persistence. By focusing on some key strategies you’ll be better equipped to handle inevitable financial challenges and keep pushing on toward the finish line.