How to achieve your financial goals with 4 simple steps.
Aka your financial game plan. Have you started laying out your financial game plan for 2022? I explain how Tori from Her First 100k suggest in laying out your own financial game plan and you can too.
Most people think that they do not need any financial game plan. Well, not unless you don’t have a goal you don’t. However, these are the general guidelines Tory suggests starting with no matter at what stage of your finances you’re in. If you are just at the beginning of your financial journey then this is definitely it for you.
1. Start an emergency fund.
While most financial gurus out there will tell you to prioritize debt first, Tori does not agree with it. Why? Because first, it isn’t wise to get into debt or go into more debt trying to pay for an emergency. You don’t want to be in a situation where you have a financial hardship or even more financial hardship trying to cover yourself during the most stressful times of your life. Secondly, prioritizing emergency savings before paying off debt is important to have mental peace of mind, knowing that you have a backup plan should anything disaster happen (knock on wood). This should be your first goal in starting out.
So where do you start? Your starter emergency fund should ideally be 3 months of living expenses (I would rather have 6 months instead but it’s to your discretion). So what you need to do is to total up your monthly expenses which are only the basic living expenses that you need. Do not include any wants or discretionary spending in it. Then, multiply that by three. For example, if your total basic living expenses for a month is $2000, multiplying that by three, your starter short-term goal for an emergency fund should be to accumulate $6000. This fund should be kept in a high-yield savings account or a cash management account.
It’s the easiest thing you can do for yourself to make more money for yourself. However, do remember that this fund is not meant to be invested. The whole point of an emergency fund is that it has to be easily accessible in case you need it. It’s only meant to be used when there’s an emergency or when unforeseen circumstances happen that could not be avoided. It’s also not meant to be excessive funds to invest when the market comes down to a price level you’ve been wanting to buy. It’s only for cases when you lose your job, or your car breaks down, or you get sick. The best part about an emergency fund is that once it’s settled, it’s done. Also, it does not take as much of a lifelong process as saving for retirement.
2. Pay off high-interest debt
This should be your second goal to achieve in the overall financial game plan. Tori defines high-interest debt as anything over 7%. That is usually the case for credit cards and for some, it might be student loans. The reason 7% is their magic number is that that is the average amount we can achieve from the stock market. Think opportunity cost. The average stock market return year over year has been about 7% to 8%. So if we are losing more money by being in debt than we could be making in the stock market, we would need to prioritize paying that debt off first.
Let’s say you have multiple credit cards and one credit card has an interest of 22% and the other at 15% and you have debt on both cards. You are going to focus on paying off the one with the highest interest rate because that’s the card that’s costing you more money. Some people like to put in extra money to pay for both cards. But Tori does not recommend it. Instead, just put in the extra money to pay the one with the highest interest rate. Focus on the one that’s costing you the most money and prioritize paying that one down first. Credit cards are a great tool if used responsibly but it can be really dangerous if you don’t use them responsibly.
3. Invest for retirement while paying down low-interest debt
It’s a two-for-one kind of deal. You’re going to start investing for retirement while paying down lower interest debt. Low-interest debt is any debt that is below 7%. It could be student loans for some, car loans, mortgages and etc. The same reason why one should pay off high-interest debt, and not pay off low-interest debt is again the opportunity cost. Your money would be much better off growing and compounding especially if you’re starting out early than to pay off a low-interest debt. This is the easiest way to grow your wealth.
4. Saving for the “big stuff”
The big stuff examples are like buying a house, having kids getting married, starting a business, retiring early, or traveling. These are usually short to mid-term goals and what Tori defines as any goal that is less than 7 years. These are the big milestones in your life that you need to save money for. So to start saving up for these “big stuff” items, you’ll need to open up another high yield savings account and start saving for that goal. You can have as many high yield savings account as you want to save for different “big stuff” goals. But remember that it's always important to start investing for your retirement first before saving for the big stuff. Because the earlier you start, the compounding effect takes place at a much higher rate in your later life.
However, there is an exception to prioritizing investing for retirement first before paying off your high-interest debt. It’s called the 401(k) match. What this means is that if you were to contribute let’s say 3% of your salary to your 401(k), your employer will double it immediately. Meaning, your employer will be contributing 6% to your 401(k) for free! It’s free money. This is the only place in the entire world where your money is guaranteed to double with just half the effort. That is why we need to take advantage of this first before paying off our credit card debt.
So with these four simple steps, I do think that anyone from anywhere around the world can easily implement them. However, it’s also easy to look at the hurdles and mountain of debt that you need to pay but with hard work and consistency, it’s just a matter of time till you get there. Hope anyone who reads this continues to hang on, persist and eventually get towards the goals they’re meant to achieve.