A 10 Step Outline Of Our Financial Plan

From a recent email –

I love your site!  (Thank you…)  I’ve been working on a basic plan for managing my finances.  Could you write a post about your current plan?  Or maybe a post about some of the things you’ve done to get where you are?  Thanks!

I love it when I get questions like these.  It makes me happy to see that folks are taking control of their own finances.  Bravo!  So, here are the basic steps I’ve taken (and plan to take), with links for further reading.

1.  I stopped using credit cards.

Before I could fill in the hole, I had to stop digging it deeper.  Putting my credit card in my wallet, and just leaving it there, taught me to live on the money that I actually make.  I do not like credit cards, and I am of the firm belief that most people would be better off without them.

2.  I started living on a budget.

This sounds very basic, I know, but living on a budget really works.  As a testimony, a brief examination of my own life.  I worked for 16 years, and had over $11,000 in debt and $500 in the bank.  10 months after giving up my credit cards and living on a budget, I was debt free.  Less than a year later, I had $20,000 in the bank.  Living on a budget works.

3.  I created a mini-emergency fund.

During my debt reduction period, I always maintained a cash reserve between $500 and $2000.  This cash reserve came in handy, and I was able to use it for “emergencies”, that in the past, would have required the use of a credit card.

4.  I systematically paid off my debts.

I used a plan like the one outlined in my free Debt Reduction E-Book.  The plan is simple.  It’s easy to follow.  It really does work.

5.  I fully-funded my emergency fund.

As soon as I paid off my last debt, I started to build an emergency fund equal to six months of my wages.

6.  I began to focus on retirement.

I use several accounts to save for retirement.  Here’s the breakdown.

Pre-Tax Accounts –

My 403(b) – 15% of our gross household income is contributed to my 403(b) account.

My wife’s pension – 5% of my wife’s salary is contributed to my wife’s pension.

After-Tax Accounts –

My Roth IRA – I make maximum contributions to my Roth IRA.

My wife’s Roth IRA – My wife makes maximum contributions to her Roth IRA.

Side Note – asset allocation (what I invest in) – I buy index-based mutual funds and ETFs.  I am not a professional investor or adviser, and my investment choices are pretty boring.  If you ever take a peek at the Vanguard VTI ETF, you’ll have a pretty good idea about how the majority of my investments are doing.  I do, however, have a small portion of my portfolio invested in very aggressive small-cap and international funds, and I own one individual stock, CLX.  Why?  I like being clean, and I like Clorox.

7.  I began to focus on saving for my kids’ college expenses.

I have opened and continue to fund 3 Education Savings Accounts (ESAs), one for each of our children.  The maximum annual contribution to each account is $2,000.

8.  I save for future major purchases.

After funding retirement and education accounts, I then focus on saving for future major purchases.  Currently, I am saving for the purchase of a newer automobile, and the possible purchase of a new home.  The new car purchase should occur in the next five years, while the new home purchase should occur within the next decade.  (I hope to pay cash for the new home.  It’s a major goal, but one I’m hoping to achieve!)  You can read more hear, about how a few years ago, I paid cash for a new-to-me automobile.

9.  I try to maintain proper amounts of insurance.

I have health insurance, life insurance, renter’s insurance, long-term disability insurance, dental insurance, and automobile insurance.  Insurance coverage can be expensive, but it’s an important part of a well-rounded financial plan.  (We waited until we were out of debt, and then we purchased additional life and disability insurance, but we had a minimal amount of both, even while in debt.)  We also have wills and other end-of-life documents.

10.  I am always looking for ways to save more and spend less.

This step makes all of the other steps possible.  In fact, it could have been number 1.  I’m constantly evaluating my spending habits, and always looking for ways to save money.  At the same time, I’m also looking for ways to increase my income and maximize my earning potential.  By the way, here are some of the best tips for saving money, submitted by my favorite people, you, my awesome readers!

I like to keep things simple – very, very simple.  The outline above is easy-to-follow.  I tend to ignore most of the noise surrounding financial planning, and focus on the things I understand.  I’ll leave the high-risk maneuvers to those who can tolerate violent swings in the economy.  For me, I want to maintain an emergency fund, methodically fund my retirement accounts, plan for major future expenses, and spend the rest of my life… living my life!