Achieving success in our financial lives, like most things, comes down to our daily behavior. A simple comparison we use at Freedom Financial is achieving weight loss. You can try diet after diet, and while you might be successful in the short-term, you won’t stay healthy until you change your lifestyle. The same goes for personal finance. Unless you find a way to create a plan that you can live by for many years, you’ll be doomed to the financial equivalent of treading water.
The most common misconception, though, is that people who aren’t practicing good financial habits are somehow lazy or undisciplined. But we’ve found a different reality at Freedom Financial. Truly, anyone who doesn’t have a plan based on the sound principles of personal finance is going to struggle to achieve sustained success.
Just look at how the fortunes of many celebrities and athletes ebb and flow. So how can you create a plan for long-term financial success? Begin by starting small.
If you haven’t been following a plan, don’t worry about long-term goals yet. This is about taking small actions every day, so you want to start with what you can do today. That means establishing a budget, saving up for an emergency fund and paying off your credit card debt. There’s some debate regarding whether you should save for an emergency fund or pay off your credit card first, but we’ll hold off on that for now.
Track expenses, then budget.
Your first step should be to establish a budget. If you haven’t done any budgeting, you may benefit quite a bit by just tracking your expenses for one month. Then, you can sit down and look at the various places your money is going and decide what you can cut back on. At this point, you’ll already have some powerful perspective on your budget.
Save $1000 for an emergency fund.
Most experts will suggest an emergency fund between $500 and $1000. You’ll have to work this savings into your budget if you don’t have it yet. But keep in mind that an emergency fund is saving you much more than the $500 or $1000 you’re putting away. The emergency fund saves you from having to take on more debt and costly interest payments.
Kevin Gallegos, a Vice President at Freedom Financial, suggests selling anything you don’t need online or through a garage sale to give your emergency fund a kickstart.
Pay off Credit Card Debt
Again, there’s debate on whether you should save for an emergency fund or pay off credit card debt first. But it largely depends on your personal circumstances. Just bear in mind that the interest payments on credit cards are a huge expense which makes saving very difficult.
Once you’ve established a basis of financial health by creating a budget and some short-term goals, you can start thinking a bit further into the future. You created an emergency fund in the short-term, but in the mid-term, you want to continue to protect yourself against unexpected (costly) events.
Shop for insurance.
Especially if you have a family that relies on your income for support, you’ll want to look into life insurance policies. The policy you purchase will protect your family if you end up passing away early. You can get life insurance at affordable prices. Usually term life insurance is the simplest, most affordable life insurance available.
Gallegos of Freedom Financial again weighs in on this, recommending that people look for disability insurance as well. He says that, “Most employers provide this coverage. But if they don’t, individuals can obtain it themselves.”
This type of insurance provides for you and your family if you’re unable to work because you’ve gotten sick or injured.
Get out from under student loans.
Student debt is the second largest portion of consumer debt in the United States, only behind home mortgages. Chances are that you have student loans. Paying off student loans removes a huge burden from your monthly budget. You might consider refinancing or consolidating your student loan debt, but this decision is highly dependent on your personal circumstances.
Financial planning can be fun too. In the mid-term, it’s time to start thinking about your dreams, like purchasing your first home. Or maybe you’re looking to make a major renovation to your existing home. Maybe you want to save a college fund for your children.
Whatever the case may be, you’ll want to start working backward to your monthly budget to figure out how much you need to save each month.
If you’re struggling to make ends meet, it’s difficult to even think about the long-term future. But by thinking long term, you leverage the power of compounding returns. A standard rule of thumb is to put 10 to 15% of each paycheck into a retirement account, ideally some type of IRA, 401(k) or 403(b).
To find out exactly how much you’ll need in retirement, you can use a fairly simple process.
- Determine your (approximate) yearly expenses in retirement
- Determine how much income you’ll receive in retirement
- Subtract your income from your expenses
- Estimate your assets at your ideal retirement date
The last step is to calculate 4% of the assets you calculated in step 4. If the amount will cover your existing yearly expenses (the expenses not covered by your retirement income), you’re on track to retire.
Why 4 percent? This is another rule of thumb that personal finance experts use. Because if you look back at the history of the U.S. market over any 30-year period, you’ll find that an account with a yearly withdrawal of 4% would have withstood any 30-year period.
But, like any rule of thumb, don’t follow it blindly. There’s no guarantee that the 4% rule will hold true forever.
Make a Plan—and Stick to It
At the end of the day, things happen—expenses pop up when you least expect them. You might fall off track at times. But that doesn’t mean you can’t achieve long-term success. By creating a plan, you’re already on track to a successful financial future.