Baby Step #1: Save $1,000 for Unplanned Expenses
I love this step. I always tell my clients to AT LEAST have $1,000 in their savings for emergencies. You SHOULD have 3-6 months worth of bill money saved as well to be very secure in your financial wellness. I personally, have a years worth of bill money saved just in case because you never know what could happen. I do not like being caught off guard. Having this money set aside gives me a sense of security and freedom.
Baby Step # 2: Pay Off All Debt Except for the House
This makes so much sense. I am very proud of my finances and even I am still in debt. There is good debt and there is bad debt. Having a mortgage is good debt. Especially if you are making those payments on time. Now, credit card debt is bad debt. This is something you should pay off before making any major money decisions. I would recommend reaching out to the company you have the credit with and negotiating a lower interest rate. Also, student loans and/or personal loans are debts you should work towards paying off before you make major money decisions. Lets say you wanted to start trying to buy a home, you need to pay off the debt to increase your credit score therefore having a better chance at a larger loan. It will also lessen your debt to income ratio. You can claim student loan interest on taxes. Paying off debt is something everyone should do as soon as possible.
Baby Step #3: Save 3-6 Months Worth of Expenses
This! I love this! As mentioned in Baby Step #1, I have a years worth of bill money saved for no other reason than my own personal standard. It is something everyone should do. Maybe not a years worth but definitely 3-6 months worth. This is always a goal for my clients because typically when they come to me they didn’t even think about having an emergency savings so adding this into the mix is mind blowing. This is a game changer for your stress. Imagine having this money saved so if in the case something comes up and you cant work for 3 months, you’ll be covered. That sense of security is what helps me stay on tops of my finances. I want to always feel like I am secure.
Baby Step #4: Invest 15% of Your Household Income
Investing is so crucial to your future life. Lets say you bring in $3,000 per month, you would need to put $450 into your investments. I know, $450 can sound like a lot right now in these pandemic times but it’s realistically the best thing you could do for yourself even though the market is bearish currently. It will come back into a bull market. Your future self will love you come retirement time. that $450 will add up and grow. When you invest you have to make smart money decisions, and also come to terms with the fact that your money might be lost at one point or another. In the end if you gain money you will be happy and if you lose money you will be wise.
Baby Step #5: Save for Your Children’s College Fund
According to data reported to U.S. News, in an annual survey last year, the average tuition for the 2019-2020 school year ranged from $41,426 (for private colleges) to $11,260 (for state colleges). That’s the average tuition per year. And unless something changes in how people pay for education, college costs in the future are going to be even worse. Here are some ways you can start saving for them now:
- Open a 529 Plan
- They are savings plans, usually sponsored by state governments, that encourage saving for future education costs. They often are tax-friendly, in the sense that many states will let you deduct your contributions from your state income tax – and when you withdraw the money for college, the money won’t be taxed. You can put money into your own state’s 529 – or any other state’s plan. So if you live in Idaho but like Indiana’s plan better, go for it.
- Put Money Into Eligible Savings Bonds
- Some of the advantages of putting money into savings bonds is that they’re guaranteed by the government and extremely low to no risk. On the downside, the interest you’ll earn is pretty low. Right now, individual Series EE savings bonds are earning an annual fixed rate of 0.10%.
- Try a Coverdell Education Savings Account
- This is a tax-deferred trust account that can be used to pay for elementary, secondary and higher education expenses – room and board is permitted. Earnings accumulate tax free, and distributions are free of income taxes as long as the funds are used for educational purposes.
- Start a Roth IRA
- A Roth IRA is an excellent vehicle for many taxpayers to invest after-tax dollars while shielding earnings and future growth from taxes forever, as long as appropriate distributions are made. As with any investment, you want to look at the pros and cons carefully – for instance, other relatives can contribute to a 529 but not a Roth IRA. If you have one, you’ll obviously want to discuss this with your financial advisor. With a Roth IRA, should a child decide not to attend college, the parents already have those funds invested for their retirement.
- Put Money Into a Custodial Account
- In other words, savings accounts called UGMAs and UTMAs (Uniform Gift to Minors Act and Uniform Transfers to Minors Act). They’re both virtually the same thing but UTMAs can hold assets beyond cash, stocks, mutual funds and so on, like a UGMA – but also real estate. There’s no limit in how much money you can put into a UGMA or UTMA, but this is best with a child whom you believe is responsible. Your child will legally be able to use the money in the account – for college or anything else – when they turn 18.
- Invest in Mutual Funds
- There’s no limit on what you can invest, and of course, you don’t have to use the money for college. But what you earn will be subject to annual income taxes, capital gains will be taxed when shares are sold and the mutual fund’s assets can reduce financial aid eligibility.
- Take Out a Permanent Life Insurance Policy
- A permanent life insurance policy is a conventional life insurance policy, but some of the money from your premium goes into the death benefit, and some of the money goes into a tax-deferred savings account. One of the pluses of doing this is that the money you save can be accessed at any time for any reason, so it is not limited to college expenses. It provides additional benefits such as a death benefit, and other living benefits, and there is no adverse impact if it is not used for education expenses. There are upfront and recurring fees that might make you think twice before doing this.
- Take Out a Home Equity Loan
- Of course, you probably weren’t intending to use your home equity to pay for your kid’s college – and with a loan, you’ll have to pay that back. So as a college fund for kids strategy goes, it’s not really the best approach – if you still have years in which you could be saving money for future education costs. But if you haven’t saved enough and are looking for a way to pay for tuition, not to mention room and board, it may work out well. But that’s why you want to start early – so you don’t have to take out as many loans – and as with any investment but especially with college savings plans, it’s always best to begin putting aside money as soon as you can. You always want to try to start your investments yesterday as opposed to tomorrow.
Baby Step #6: Pay Off Your Home Early
Remember this is good debt? Paying it off early doesn’t hurt though. It will boost your credit score when you make more than the minimum payment on any debt and this is included. Even if you pay $100 more than required it will keep you on the right track to paying your home off earlier than expected. Once you have your home paid off you can put those funds into savings or retirement and get you closer to that goal. Basically, eliminate the monthly amount going toward your mortgage, freeing up cash flow that can be useful, especially during retirement. Save money on interest, potentially thousands of dollars. Receive a predictable rate of return, equal to the interest rate on the debt you’re paying down.
Baby Step #7: Build Wealth & Give
Generous People Are More Prosperous. There is a common misconception that in order to get wealthy you have to be stingy, and not be very giving. Giving to others makes you less selfish, and less selfish people have more of a tendency to do better in both relationships and in wealth building. Building wealth is the process of generating and maintaining long-term income through multiple sources. This includes your savings and any assets that generate income, such as your investments.
- Stay away from debt.
- Make a zero-based budget each month. (every dollar has a job)
- Save money.
- Live on less than you make.
- Be a giver.