Step 1 – $1,000 in an emergency fund (or $500 if you make less than $20,000 per year)
Step 2 – Pay off all debt except the house utilizing the debt snowball
Step 3 – Three to six months expenses in savings
Step 4 – Invest 15 percent of your household income into Roth IRAs and pre-tax retirement plans
Step 5 – College funding
Step 6 – Pay off your home early
Step 7 – Build wealth and give
If you don’t already have an emergency fund, plan NOW to start one. First goal of your emergency fund is to have $1,000. Find a good money market account to park the money and forget it, until an emergency comes along. Remember Murphy’s Law: If anything can go wrong it will.
Your second goal, for your emergency fund, is to have three to six months of living expenses set aside in your money market account. Getting to your second goal will take a little more effort to achieve and you may want to start a debt stacking or snow balling plan to get out of debt so you can allocate more money to reach the three to six months living expenses goal.
First and foremost, get the $1,000 saved. Make is a goal to do this in the next one to three months.
Finally, if you are not on a budget, start working one NOW. Track every dollar you spend for the next month or two and see how much money you are just wasting.
In a standard 30 year home mortgage with half (50 percent) of the payments made on the loan, the principal is only reduced by one fourth (25 percent). It takes about 23 years of payments to pay the principal down to half (50 percent).
To break this rule you can make biweekly payments or make an extra payment each year and pay off your mortgage earlier and save thousands on interest.
When you are younger, your need for life insurance is greater when you are just starting your family, you have young kids and a new mortgage. Death of the breadwinner would be devastating at this point since you have not had time to accumulate wealth.
When you are older, you should have fewer dependants, fewer financial responsibilities and you have had time to accumulate money through saving and investing. Thus, your need for life insurance is greatly decreased and you have cash for your retirement years.
The Rule of 72 will let you know approximately when your money will double. To find out when your money will double divide your interest rate into 72. The Rule of 72 shows you how money compounds given enough time. It also will illustrate at what interest you need to earn to double your money in a given number of years.
Example – If your interest rate is 2 percent, divide 72 by 2 and that equals 36, so your money will double in approximately 36 years at 2 percent interest. At 4 percent it is 18 years, at 6 percent it is 12 years, at 8 percent it is 9 years, at 12 percent it is 6 years.
Hypothetical example – say you invest $10,000 at 6 percent interest when you are 22 years old. When you reach the age of 70 you would have approximately $160,000.
Hypothetical percentage rates and values, subject to applicable taxes.
Begin your path to financial independence by arranging your present income:
Pay yourself first
Earn additional income
Adjust your priorities
Avoid the credit trap
Realign your assets
Pay Yourself First – decide on a set amount, or percentage, of your income and deposit it into a savings or investment vehicle from each paycheck on an automatic basis, i.e. direct deposit, pre-authorized check, EFT.
Earn Additional Income – a part-time job can go a long way in starting or enhancing your saving or investment program.
Adjust Your Priorities – examine your purchases and decide if it is a want or a need. One easy method is to set up a budget, then stick to it.
Avoid the Credit Trap – pay off your credit cards each month. If you are unable to do that then seriously reconsider making the purchase. Avoid the double-digit interest rates credit card companies are charging these days.
Realign Your Assets - two areas to look at in your family are:
Low-interest Savings: move your money from a low interest savings account into one with a potential for higher returns
High Cost Life Insurance: protect your family with affordable term insurance. This could potentially save you thousands of dollars over time.
Here is a list of three savings accounts you need.
1. Emergency Fund: It is recommended you have 3-6 months’ salary saved for emergencies which include such things as job loss, medical bill, or major household repair. Some experts now are saying 6 to 12 months’ salary. If you don’t have an emergency fund set up, set one up today and set goals to reach. The first goal should be to have at least $1,000 saved.
2. Short-Term Savings: Avoid credit card debt and plan to save for vacations, computers, etc.
3. Long-Term or Retirement Savings: This includes savings for college fund for your children or grandchildren or retirement.
We all need to start saving early for retirement. Here is how $28,000 equals $136,000. If you start saving for retirement early! Say from age 22 to 62, one person started saving $4,000 a year at age 22 for 7 years ($28,000). The other waits 7 years and starts at 29 and saves $4,000 a year for 34 years ($136,000). At 62 both would have about $1,200,000. Assuming a hypothetical 10% return, monthly compounding and tax deferred accumulation in an IRA.
