What are the 5 most important steps to turning around your financial situation?
The first step to recovery is admitting you have a problem. So that’s the first step. Take a financial selfie. Take stock. Assess your situation without rose colored glasses. The only way to get on track is to get your head out of the sand. I always say the best diet is one where you only eat while you’re naked in front of a mirror. So, get naked.
The second step is creating a “spending plan”…call it a “spending plan” instead of a budget just like you call it an “eating plan” instead of a diet when you are sticking to something sustainable. Create the 3 Es… “Essentials” “Endgame” and “Extras.” 70% of your income go to the “Essentials” which is housing, transportation, food…all the “essentials” (duh!). At least
15% should go to the
“Endgame” which is
savings in all forms like
retirement, an emergency
fund or investments. No
more than 15% should go
the “Extras” albeit a latte,
mani/pedi, another LBD,
whatever…I don’t care
what you do for fun but
when that percent is done,
the party is over. It’s
important to allow for the
latte (despite what other
financial experts tell you)
– it’s a small indulgence
that keeps you on track
and keeps you from
bingeing later on.
The third step is figuring
out your goals. If you don’t know what you want, you can’t figure out the financial path to get there. I love alliteration so I’m going to call your goals buckets the 3 Fs: “Family” “Finance” and “Fun.” Write down your 1,3,5,7 and 10 year goals in all areas. I break it down into those small increments so it feels more attainable. You might think you know what you want but in reality most people don’t and hum and haw when asked the question. Some people tell me “Nicole, if I just had a million dollars I would be set.” Yeah? What do you want to do with that million dollars? Maybe you need more, maybe you need less. Decide what life you want to live first then reverse engineer and work to get the money to live the life you want.
Then, create an emergency fund. This is the “oh crap” fund. You don’t want to think of a doomsday scenario but you have to if you want to have your own back. Ideally you’d have 9 months to 1 year of what it takes to live off in the bank. If, let’s say, you lose your job or get sick, you can’t pay for groceries with a mortgage. You need cash on hand that you don’t touch until you have to “break in case of emergency.”
The fifth is dealing with retirement. Oh, I know, you’re not getting old…riiiighhhht. Listen, I don’t think I’ll ever retire but I know my future self will
thank me for getting down with it now. The 401
(k) is the darling of the retirement world but there are others. An IRA or Roth IRA (the only difference is that in a “Roth” you pay taxes now instead of later…which is often preferable because likely taxes will only go up as will your income…obviously…so that means so will your tax bracket) is something anyone can get…it stands for “individual retirement account.” (BTW- you have more options if you own your own business.) And you can and should have both. In the retirement world the more the merrier for a fabulous Betty White life later on.