Whether you are just starting out with your first paycheck or you have been earning money for many years, it’s important to have your financial foundation strong so you can start building wealth.
Below are three areas to strengthen and tips to get started. These are the basics you should have covered. It helps to check in and review each of these areas every few month to see where you are with each one and what things you could do better.
You may have the bandwidth to make only small changes at first. But it’s important to start moving and taking steps, even if the steps are small. You’ll learn what works and what doesn’t. Keep taking more steps and you’ll find your finances getting stronger and your wealth growing.
Your process won’t be perfect right away, and there will be things you will want to modify and refine, but you can work on that as time goes on.
One: Set Financial Goals
Have a picture in your mind of where you would like to be in the future. Try to look out 5 or 10 years into the future. The picture will vary depending on where you are in your career and life. Maybe you would like to move to a new location, retire early, get out of debt, stay home with the kids, open a business, buy a house, or take a long trip.
The idea here is that money isn’t the end goal, it’s only a means to help you reach your other goals. It helps to have a future vision of where you would like to go so your savings become more meaningful. Maybe you don’t have a specific goal right now but you want the flexibility to do these things in the future. Saving to have more freedom in the future is a great goal and one of my favorites.
Make the Goal Measurable
Write down a goal that helps get you to your future picture. Make it measurable by giving the goal a number and a time frame.
Goal: Save $20,000 by the end of next year towards a down payment on a house
Goal: Save $200 extra each month to start paying your debt off faster
Goal: Start putting an additional $1,000 in your 401K each month to retire earlier.
Two: Track You Finances
Know how much of your money is coming in and how much of your money is flowing out. You can use a spreadsheet, online software, or a paper and pen, but start doing it now.
I can’t say enough good things about this one (and will say more in a later post) but for now I’ll list a couple of reasons.
Brings More Awareness to Your Spending
Tracking your expenses brings more awareness to how you are spending your money. It makes you stop and think: Do I really need/want this? Will it make my life easier? Is it worth it to buy now and not put as much towards my future goal?
Sometimes the answer is “Yes, this is worth it!” So go for it and know you are spending wisely. But sometimes you’ll pause enough to realize you have something similar and don’t really need it or you would rather save it for later.
The more you take a moment before buying things, the better you’ll become at knowing what’s worth it to you and what’s not.
Gives You a Roadmap to Reaching Your Goals
So you’ve decided on a goal such as paying off your debt sooner but how do you find the money to do that? That’s where tracking your finances comes in handy.
If you’ve been tracking your expenditures, you’ll be able to see which category looks frothy. Maybe it’s cutting $50 dollars from your food budget and $50 from shopping budget. Or maybe there are some reoccurring expenses that you can reduce or cancel. Give these cuts a try and in a month, look over your expenditures again. What worked, what didn’t? Refine and repeat.
Three: Invest
Start investing today. Compounding is powerful stuff and the sooner you invest, the sooner your returns will start the compounding magic.
You may not see the results right away, but when you are 20 years in the future, you will be thanking yourself. Just start, any amount, and make it consistent.
Some pointers to get you started:
Automatic is best
Set an amount that you feel comfortable investing each month and set up a monthly withdrawal. Have it withdrawn from your paycheck or checking account each month and have it go into a saving account that you will invest regularly.
Or better yet, have the money go directly into a brokerage account that will invest the money in an index fund. You’ll be able to take advantage of the natural market swings by investing at the same time each month and you won’t have to think about timing the market.
Start with Retirement Accounts
Retirement accounts are the first place to consider since your investments will grow tax-free. Look into investing in your company’s retirement fund first (401k), especially if your company has a match policy for contributions.
With a match policy, your company will match a certain portion of your contribution. For example, many companies will match the first 3% of your income that you contribute to your 401k. Your Income = $100,000, Your Contribution (3%) = $3,000, Company Match (3%) = $3,000, Total Contribution = $6,000.
If your company doesn’t offer a retirement fund, open an IRA (individual retirement account) with a brokerage firm. Take a few moments to set-up automatic investing so the money will be withdrawn from your paycheck and invested each month.
Use Index Funds or ETFs
Invest in index funds or index ETFs (exchange traded funds) whenever possible. An index fund aims to replicate the stock market and does not have a person actively trying to pick stocks or bonds that will beat the market. Studies continue to show that investing in index funds is the best and easiest way to invest your savings and build wealth.
