This post is 1,372 words a 6-minute read.
One of the most crippling feelings I have ever had, was when I got a project at work because a coworker quit. The project needed to be completed in a very short time frame. Because I was never involved in the project, I had no idea what the project was about and at what stage the project was. I was frazzled and a little panicky. I kept getting bits and bits of information from various sources and each time a new piece of information came through it would rattle me.
The question that kept playing in my head was
I believe this is what most of us feel whenever we begin working on our finances. We feel like a project has been dumped on us and we have no idea what to do. After learning about Money Lesson #1 Tracking Our Expense then Money Lesson #2 Vision & Goals. We can feel overwhelmed and shut down. I do not want that for any of us.
My saving grace on that project, is a checklist and project guide that we have. It provides an overview to determine steps to take and when we to take those steps. It gives us a path to follow that enables us to make the best decision initially then tailor the project to fit the situation.
My goal is for this post to serve as a guide to help you think through how to use your next dollar. To help you think through what the best decision for your finances might be. It is important to note, there is no right answer. This is the answer I have arrived to for myself.
Let's Begin
Safe and Boring
The first part of your financial life is all about removing as much risk as possible. It is nothing exciting, but it is the most important part of your finances. To accomplish this phase, Money Lesson #1 will be vital for your success. You must know where your money is going.
The two biggest risks you face come in two forms:
Life going full life aka situations you have no control over. A few examples:
A flat tire
A tree on your house
A medical emergency
Leverage aka Debt.
These are typically the two ways that our financial situations are completely blown up. This is because in the beginning of your financial journey a bit of bad luck can turn into a storm rather quickly. The question is how do we mitigate these risks?
Step 1
To mitigate the first risk is to have an Emergency Fund. I love the way Professor Scott Galloway puts it, "An Emergency Fund is Kevlar against the bullets life shoots at you. Sure, it will hurt like hell when you are hit but you won't die."
Having an emergency fund is how you ensure that bad luck does not turn into total disaster. However, a follow up question to this is "How much do I need in my emergency fund?" In this early stage, there are a couple of ways to think about it:
A flat amount, for example Dave Ramsey has the $1000 emergency fund.
I think that is now too low for most people in 2024.
However, it can be a struggle for someone who has never saved any amount of money to save more than $1000.
It helps emotionally to get people to feel good about saving and making progress.
An amount based on your highest insurance deductible. (My preference for most people)
Based on all your insurance i.e. car, health, house, etc.
Save the amount that you would need to come out of pocket before insurance kicks in.
For example: if you have car insurance with a $500 deductible, health insurance with a $1500 deductible, and house insurance with $3000 deductible.
Save at least $3000 that way if something does happen you can cover it.
This protects with insurance and gives a level of flexibility when you first get started.
Step 2
Pay off all High-Interest Debts excluding mortgage. When I say all, I do mean ALL! Yes, this includes student loans.
I define high-interest debt as anything with an interest rate that is higher than 5%. The main purpose of paying off these debts is to de-risk your life. I love what the Bible says, "The rich rule over the poor, and the borrower is slave to the lender." - Proverbs 22:7
Debt is like having a ball and chain at your feet. It limits your options and continually holds you back. The faster you can free yourself from those chains, the more options are opened to you.
Primarily I want you to focus on paying off consumer debt. Such as credit cards, auto loans, personal loans, old loans for businesses that never materialized.
There are two methods to pay off debt:
Debt Snowball - lowest amount first then work your way up. This method is my preference because of the psychological wins you achieve on the path.
Debt Avalanche - highest interest rate first then work your way down. This is the mathematically better option but requires more personal discipline.
It does not matter which option you select, choose one and get to work.
Optional Step 3
Begin contributing to a retirement account aka begin investing for your future self. This step may not be for everyone; however, if you have the income to be able to handle either saving your initial emergency fund and starting investing or paying off your debt and investing.
I implore you to begin the habit of investing because it is a muscle that has to be built earlier rather than later. Plus, time is the most important factor in investing, the earlier you begin the better it will be for you.
Here are the ways you could do this:
Contribute to a company-sponsored 401(k) plan.
Typically, you will be offered a free match up to a certain percentage.
Free money is free money.
It is part of your compensation package.
Contribute to a Roth IRA
This account is owned and controlled completely by you.
You have to open it yourself. I recommend using one of the following brokerages: Charles Schwab, Fidelity, or Vanguard
I use Fidelity. I have set up Charles Schwab and Vanguard for various friends and family members.
Honorable mentions for new tech-focused options: M1 Finance and Sofi. **insert share links from these two platforms
I say start with like $50 or $100 if you can push it.
Remember both the 401(k) and Roth IRA are just accounts. You have to select investments within the account. I suggest everyone start with a basic target date fund.
For a 401(k) some companies will give you the option of having one of three portfolios. If you are just starting and do not have much invested, select the aggressive option.
For Roth IRAs or 401(k) without the first option. Select a target date index fund. To find the one for you, search Google for the following:
"Name of Your Brokerage" Target Date Index (Year You were born + 70)
Example: Fidelity Target Date Index Fund 2064
Here are a few examples from the three brokerages:
Fidelity Freedom Index 2065 Fund (FFIJX)
Schwab Target 2065 Index Fund (SWYOX)
Vanguard Target Retirement 2070 Fund (VSVNX)
This will be a great way to get started investing. As you learn more and grow in your financial knowledge, you can make adjustments.
TWO IMPORTANT NOTES:
The money added to these accounts is not to be removed. Otherwise, there are tax penalties you would have to pay.
Pay attention to the word "fees" when you are selecting your investment options. You are to pay nothing more than 0.2%.
Now that you have established a level of Financial Safety by getting out of debt, having an emergency fund, and starting a basic investment plan. It is on to the next stage.
We will stop here for this week. Next week, we pick back up with what I call "Security and Fulfillment". This is where we get to make choices for our lives, using Money Lesson #2.
Thank you for reading.
Generosity>greed
✌🏾
Recommended Reads
A new podcast I am loving is called 50Fires. It is by Carl Richards, a recovering Financial Planner and Advisor, who although could help other people with their finances. Had a difficult time talking about money with his wife and children. It has quickly become one of my most anticipated podcast to listen to every week.
I was also inspired by Nick Magguilli’s blog post, Where You Should Put Your Money (And When).
A huge inspiration of my way of thinking about money is the Money Guy Show. A Podcast and YouTube channel that I have listened to for tha last 4 years. You can read their version of the Financial Order of Operations.