Step 1: Investing
We have to start with the tried and true statement of ‘save early and consistently’. It’s so easy to fall into the thoughts of ‘retirement is so far away’ and ‘I have lots of time’. It may not seem as though in your 20s and 30s you need to start thinking about retirement; however, your wealth will grow much faster if you do. Take a look at the following example:
Cindy saves $400 a month from age 21-40 then stops saving all together. So she has input $91,200 into her 401k. Say it grows 8% a year. She would have about $2,239,000 at age 70.
Now let’s look at Corey.
Corey started saving $400 a month at age 40 until age 70. She has input a total of $144,000 into her 401k. Say her 401k grows at 8% a year then she would have $596,000 at age 70.
Are you in shock at the difference?
I’ve been in this industry for years and this calculation still gets to me. This example isn’t to say that if you didn’t start at age 21 then “too bad for you”. It’s time to start now.
Not tomorrow.
Now.
I recommend contributing at least 15% of your income to retirement savings. Is this your first job? Put in at least 15%. Just moved to your dream career….put in at least 15%. Always have the retirement at your work turned on and coming automatically out of your paycheck.
Step 2: Car Purchase
I’ll cut straight to the chase. Buy a car you can pay cash for or, at the longest, pay off in 2-3 years. I can never say this enough. Car payments are the payday lenders of the middle class and suck the monthly liquidity right out of your budget. Don’t fall into the trap of thinking that having a car payment is a life time sentence. Have you heard of being house poor? Well, it’s just as common to be car poor.
I know a few of you physically cringed at the suggestion of paying for a car in cash. It is doable. It may involve having a car with a dent in the side already, that doesn’t have a sun roof, or isn’t made in this decade. And that’s all right. If your friends are judging you on the year and model of car you drive, then time to get new friends. Your self worth is NOT attached to your car. Regardless of what advertisements say.
Step 3: Home Purchase
Buy a house you can actually afford.
Don’t let the amount the mortgage lender will loan you determine the amount of mortgage you can afford. That’s essentially the same as letting a car salesman tell you how much car you can afford. Mortgage lenders make commissions from mortgages. They are sales people. They don’t have an interest in whether the payment you want will make you house poor.
Sit down with your family, look at your income and spending for the past year, and make a budget. Your mortgage payment (including taxes and insurance) along with your utilities should be around 25-30% of your take home pay maximum.
Already own a house? Check to see if the payment and utilities is around 25-30% of your take home pay. If it’s higher, you need to increase your income. Consider renting out a room, getting a side job, or (make sure you’re sitting down) selling it.
Step 4: Avoid Debt
Companies are so willing to help you get into debt. You probably have received a credit card offer this week already. Having debt payments sucks up your income hence hindering your savings. Credit cards and loans make it way too easy to overspend and quickly create lifestyle increases. Having debt on items that loose value is a bad, bad, bad situation. Paying off a pizza or ‘those must have pants’ from six months ago puts your family is a rough spot.
Sit down with your family and make a commitment to staying out of consumer debt. Then talk about what it would take to achieve it. I suggest getting pen and paper to write down the types of debt you want to stay out of, then sign it. Hang the agreement on the fridge as a reminder of the commitment you made for when Amazon Prime day comes along.
Step 5: Have a ‘Family Spending Plan’
If you don’t tell your money where to go there is always someone out there who is willing to. Live intentionally. This means:
- making a budget
- using a spending tracker to track that budget
- having a family spending agreement in place
If you’re like most Americans you started working, maybe started a family, and you just assume/hope there is enough money to cover your needs. What happens when your spouse wants a new laptop or dirt bike? What is the protocol? Do they have to talk with you first? Would you be okay with your spouse spending $700 on a coffee maker without talking to you first? When do you want to retire? How much emergency fund would make you comfortable?
It’s time to get intentional. You can use EveryDollar, Mint, or our client software to create your budget then, importantly, track your spending. If you put on the budget that your family spends $400 a month dining out then you need a way to determine the actual amount spent each month. Not having a feedback loop is why most budgets fail.
Lastly, create a family spending agreement. Sit down, without distractions, and have a real conversation about spending, debt, savings, and dreams. Choosing to be intentional is choosing to be successful.
Please feel free to contact us if you would like assistance with these steps or your financial situation. You can go to our Contact page to schedule an introductory phone call.