The beginning of the New Year is a great time to chart new financial goals. Finances are a hard area. It’s hard to balance month-to-month obligations with paying off debt, building an emergency fund, long-term retirement planning, and saving for college tuition while actually getting to enjoy the fruits of your labor with family vacations and the occasional splurge. It seems like an impossible feat!
I remember walking to my bus stop with a coworker many years ago. We were talking about savings, and she mentioned the amount she likes to keep in her savings account at one time. My eyes got big, and at that time, it seemed like such a lot of money that would be impossible to save.
However, it did inspire me to begin getting my own financial house in order. Having that goal was an important first step, and I began to visualize how I wanted my financial house to look. I discovered Dave Ramsey, who has Seven Steps to a journey to financial peace. To me, his steps are very practical, and they are steps I feel like I can get through if I focus.
Step One: Establish an emergency fund of $1,000
This fund is for the unexpected events of life like needing new tires or a new car battery. These events will happen. It is just a matter of when. The fund will help you to not add to any debt when they do happen.
Step Two: Pay off debt
This includes listing all of your debt but your mortgage. His method is the snowball effect where you pay off the smallest amount (by paying more than the minimum payment) first regardless of the interest rates of your debt (just making the minimum payment on all other bills). The quick win gives you momentum. Then you move on to the next smallest and so on until all debt is paid off.
Step Three: Have three to six months of expenses in savings
This money is for emergencies and should be kept liquid in a money-market account. Then when the unexpected happens, you are prepared.
Step Four: Invest 15% of household income into Roth IRAS and other tax-advantaged retirement accounts
In this step, your mortgage is your only debt. You are able to begin saving toward your retirement.
Step Five: Create a college fund for your kids
Look into things like Education Savings Accounts and 529 Plans.
Step Six: Pay off your mortgage
If you have any extra money, put that toward paying your mortgage off early.
Step Seven: Build wealth and give
With this step, you can think about leaving an inheritance for your kids as well as give liberally to the many charitable organizations in abundance.
None of the steps preclude the giving of your tithes and offering or giving to charity. At Step Seven, you can just give more abundantly.
The process can be a little painful. As I go through the steps, it helps improve my financial health. Like any process, you have to adjust it to fit your needs and reality. For example for me, being able to go on vacations is important. Yes; I could use the money toward investing in my retirement fund or paying off my mortgage, but living in the here and now is also important.
I have a plan and a vision to be financially healthy.
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