Your Financial Path to Embrace Any Future
Achieve Financial Freedom: Progress, Patience, and Perseverance
As we celebrate Financial Literacy Month, it’s the perfect time to reevaluate and strengthen our personal finance knowledge, empowering ourselves to make informed decisions and achieve financial success in this rapidly changing world. Indeed, technology has accelerated the speed at which we receive news, witness blunders, and experience systemic issues—everything seems to happen in the blink of an eye, and it can be overwhelming. Amidst this whirlwind, I’m reminded of the importance of plans, reviews, and retreats.
No one can predict the future, but I firmly believe that having a strong foundation in personal finance helps us navigate life’s challenges with confidence so we can embrace any future that comes our way. Let’s revisit a common set of steps to personal finance success—keeping it to 10 essential steps with a twist—to help us restart and reconsider what is possible.
Step 1: Assess your financial situation: Begin by evaluating your current financial standing. Create a personal balance sheet by listing your assets and liabilities. This will give you a clear snapshot of your net worth.
Know how much you have in assets divided into three buckets (taxable, tax-deferred, and tax-free). If you wish to retire early and need to navigate early access penalties, this will be important. Keep in mind, too the best-made plans can change if you have a big success or a large write-down.
Step 2: Set financial goals: Identify your short-term, mid-term, and long-term financial goals. Be specific and realistic and prioritize them based on importance and time horizon.
A common goal is to have enough investment income for a balanced life. What is your investment income number you would need? How much dividend income, rental income, interest income, business income, and royalty income do you already have today? What is your gap? And how do you close the gap?
Step 3: Create a financial forecast: Develop a monthly forecast of your income and expenses. Categorize your spending. This is not a budget but rather an overview of where your dollars are going today.
Have you allocated money for reserves (medical emergencies, job loss, home repair, maintenance, and replacements)?
Have you allocated money for accelerating your debt repayment?
Consider those pesky subscriptions. Watch out; they are everywhere and can be hard to turn off.
By the way, budgets can be pie in the sky. To avoid the trap of a perfect plan, I would suggest editing your existing spending instead. Tackle one item at a time. See if your spending aligns with your values.
For example, a personal value for me is to make meaningful purchases of items that could generate income or help me create memorable experiences with my family and friends. This helps clarify things for me when I’m deciding on big purchases.
Step 4: Build your own Self-Insurance Reserves: This includes having modern skills and a strong network for your next career move or jump-starting a side business. A self-insurance reserve also includes replacement reserves, as noted above.
Create 4-6 months’ worth of living expenses for that last line of defense when it’s not raining job opportunities.
Step 5: Pay off high-interest debt: Focus on paying off debts with the highest interest rates first, such as credit card debt or personal loans, to minimize interest payments and improve your overall financial health.
I recommend the Snowball method time and again. Debt accumulation tends to have emotional ties. Reverse engineering how you got there. Seeing small wins helps to build momentum and change your psychology. It, too, can be addictive –in a good way.
Step 6: Save for flexibility (formerly known as retirement): Invest in different asset classes (real estate, public company ownership, small business, etc.) and account types (401(k) or IRA).
Take advantage of employer matching contributions if available and increase your savings rate as your income grows.
***New*** In 2023, companies can now contribute to your Roth 401K plan if your plan offers it. There were many tax and retirement changes in Secure 2.0. This was one of them!
Step 7: Diversify investments: Develop a diversified investment portfolio that balances risk and reward.
Review for liquidity, cash flow, access to equity, risk tolerance, and time horizon. It’s one line, but this is a powerful set of questions and items to look over. Had Silicon Valley Bank done the same, the world would not have known its name, and its investors would not have been wiped out.
Step 8: Protect your assets: Ensure you have adequate insurance coverage, including life, health, disability, property insurance, umbrella, long-term care, and business insurance (including Keyperson).
Find an agent with whom you can partner as your financial horizons grow. Review and update regularly.
While Long Term Care is hard to find and expensive, start early and stay healthy. This can protect the rest of your assets. A friendly calculator to consider: https://bit.ly/2PaUw4d
Step 9: Plan for taxes: Understand the tax implications of your financial decisions and take advantage of tax-saving strategies.
There are 80+ strategies available depending on your financial and life facts. Taxes are the single largest expense you have.
Actively work to figure out how much tax you are willing to defer, how much you are willing to pay now, and what you will do with those after-tax dollars. Have those soldiers work for you!
Step 10: Quarterly Financial Reviews and Retreats: Take a weekend each quarter and reassess your financial plan to ensure it remains aligned with your goals, priorities, and life changes. Adjust as needed to stay on track and adapt your plan for new life changes. They will happen all the time, so flexibility and freedom come from having honest conversations with yourself and your partner each quarter. It doesn’t have to be expensive but get away for the weekend. You deserve quiet time to review, celebrate and enjoy your surroundings. Here’s a suggestion:
On a Thursday, prepare all your documents for your review.
Take a weekend and go away to a fun place.
Friday night, take a breather and enjoy your surroundings.
Saturday morning, review the financials and discuss where things are relative to your goals. Include what changes you wish to make.
Use your afternoons and evenings to celebrate your financial progress and the creative ideas you came up with during the session.
Sunday morning, confirm and agree on what changes, if any, you wish to make.
Head home and exhale. You are making progress!
While I would love to say I do step 10 with a getaway, it’s unfortunately not a habit —yet. But I sure do dream of the time it will be.
Start planning now for your next quarterly finance review. Go someplace dreamy, whether local or far away. You deserve it!