The 10 Step Plan to Your Financial Future

Nearly everyone who sets a New Year’s Resolution breaks it (80% according to this article). The truth is that it’s easy to set goals, but it’s hard to achieve them. If you’re not actively working towards succeeding at your goal, entropy is working at tearing you down to an inevitable failure. Today we’re going to lay out the framework for accomplishing a set of financial goals that resonates with many, many of the people reading this: getting rid of debt and saving for the future.

No matter where you’re starting from in your financial life, nor where you’re trying to get, the path to financial security in America is always the same ten steps. So let’s take a look at them…

The Ten Step Plan to Your Financial Future

1.       Find out where your money is going and where it needs to go

2.       Save up a small emergency cushion

3.       Max out all 401k matching options from your employer

4.       Pay down all high interest debt

5.       Save up a 3-6 month emergency fund

6.       Pay down remaining debt

7.       Max out HSA investments

8.       Max out Roth IRA investments

9.       Max out 401k investments

10.   Invest your remaining income

That’s it. Ten steps to take you to zero debt, thousands or millions in net worth, and the future you dream of for you and your family. Let’s dive a bit deeper into what each of these steps means…

Step 1: Find out where your money is going and where it needs to go

The first step to untangling your financial life is knowing where your money is, how much you have, and where it needs to go. Contact each bank you believe you have an account with, talk with your human resources person at work to find out where your retirement accounts are invested and how to access them, and most importantly contact any debtors you believe you may have to find out how much you owe to others. You’ll also need to track your spending so you know what you’re buying each month. You’ll use this information to create a budget.

Sound a bit daunting? Don’t be intimidated. I’m going to show you easy ways to automate this work so you can get the results you need while focusing on what you love about life instead of money. For now, track down everywhere you have money (don’t forget your retirement accounts) and everywhere you owe money so you know where your money is and where it needs to go. Don’t forget, you can use the federally mandated government website to get your annual credit report each year for free to help track down some of these sources. AnnualCreditReport.com is located here. (This is the government website, not some commercial ripoff site with a catchy jingle trying to charge you $9.99 for credit monitoring services; you can get your reports here for free once each year).

Read on to tackle this step using the lazy method.

Step 2: Save up a small emergency cushion

An emergency cushion is a small amount of money you save that you never spend except in cases of financial emergency. It’s a cushion to help you on a rainy day, like if your car breaks down or energy prices spike up during a particularly cold winter. It helps to ensure you don’t have to take on more debt while getting out of debt. It is not money you use to buy a new car because you don’t “like” how your old one looks. It is not money you use to buy new boots because OH-MY-GOD-THEY’RE-SO-CUTE-AND-PERFECT-I-JUST-HAVE-TO-HAVE-THEM. Your initial emergency cushion while you’re building yourself out of a financially distressed situation should be small, but enough to cover minor financial emergencies. A good target is $1,000 in your bank account that you don’t touch except in emergencies. Later you’ll grow this to a full emergency fund, but let’s not get ahead of ourselves.

Step 3: Max out all 401k matching options from your employer

There are plenty of financial gurus out there who leave this step off the path to achieving your financial goals, but I believe it’s hugely important. If your employer offers a financial matching option for your 401k investments through work, take advantage of it! Failing to do so is leaving money on the table. For example, I once worked for an organization that offered a 100% match on each dollar I put into my 401k account up to the first 3% invested. That means if I put in 3% of my income into my retirement account, my employer doubled the amount in addition to my regular income. It’s like getting paid twice! It also means my return on my “investment” was 100% before it even hit the market. That’s a pretty extraordinary rate of return, and you’re unlikely to be able to beat it even by paying down other forms of debt or investing in other savings vehicles. Make sure to take advantage of this option if it is offered by your employer before moving on to step 4.

Read more about saving in a 401k here.

Step 4: Pay down all high interest debt

When it comes to taking control of your financial goals, debt is your worst enemy. It’s an insidious pest eating away at your money, living large on the back of your hard labor. High interest debt (debt with an interest rate of 5% or higher) is the vilest form of this pest, and paying it off is your top priority in step 4 of the plan to reach your financial goals. Once you’ve saved up a small emergency fund (step 2) and you’ve maxed out your employer’s 401k matching at work (step 3), you’ll take all of the money left over after you’ve purchased the items you need to live in a month from your budget (created in step 1) and put it towards your high interest debt. You also won’t be taking on any new debt! “Minimum payments” is no longer a word in your vocabulary; you now put all of your extra income towards paying off that debt blowing past the minimums and aggressively exterminating the parasite of paying someone else to spend money that is debt. At the end of step 4, your high interest debt will be gone forever.

Read more about paying off your debts here and here.

Step 5: Save up a 3-6 month emergency fund

In step 2 you saved up a small emergency cushion. Now that you’ve paid off your high interest debt (step 4), it’s time to provide yourself and your family a bit more security in the event something comes up in the near future. It’s time to fully fund your emergency fund for serious financial concerns that will come up unexpectedly in the future. Using the budget you created in step 1, determine how much money you need to live for 3-6 months. Then save that amount of liquid cash and put it into your savings account. This may take a few weeks or months depending on your savings rate, and that’s okay. What’s key is having this money should something serious come up and you or your family needs it in the future. Whether you save 3 or 6 months of expenses is up to you to determine; what number makes you feel more safe? If you’re a dual income family, 3 months may suffice because in the event one of you loses your job the other still has one. If you’re the sole income earner, you may want to put away the larger number. And remember, your emergency fund is for actual, real life emergencies. It is NOT for buying the latest and greatest gadget, style, or vehicle to come out this year.

Find out how your emergency fund could be the best career move you ever make.

Step 6: Pay down remaining debt

Once you’ve got your security blanket saved up in the form of an emergency cushion and then an emergency fund (step 2 and step 5), it’s time to pay off the rest of your outstanding debt. This debt is the low-interest debt you had left over after finishing step 4, and it’s still a parasitic beast eating away at your financial goals. Don’t let it! All of your extra income each month (use your budget from step 1) now goes towards beating back the low-interest debt monster. Get rid of the last of your student loans. Finish off family loans from gracious members who helped you out in a pinch. Whatever the debt might be, step 6 is when you banish it from ever disrupting your financial goals ever again.

(Full Disclosure: Up until now the steps to financial independence have all been straight forward. You follow each of them in a row. I strongly believe step 6 should be paying down remaining debt, but some people prefer to leave low-interest debt and instead skip to steps 7, 8, and 9 before paying down debt. That’s up to you. But on the Bill Stark Blog? Step 6 is PAY YOUR EFFING DEBT!).

Step 7: Max out HSA investments

Now that you’re out of debt (step 4 and 6), invested in your company’s 401k matching service (step 3), and have your emergency savings fully stocked (step 2 and 5), it’s time to start investing your money for the future! If your employer offers a Health Savings Account, max out the amount of money you can put into the account (in 2016 that’s $3,350 if you’re an individual, $6,750 if you’re a family).

Read how the HSA is the most powerful retirement account in America.

Step 8: Max out Roth IRA investments

Once you’ve finished up saving in your HSA, you’ll want to max out the money you can put into a Roth IRA. This is a special tax protected savings vehicle for Americans that allows you to turbo-charge your savings for retirement. Being properly prepared for retirement is one of the key goals of the financially conscious, and the Roth IRA is a key part of a strategy for saving enough. In 2016, the maximum you can save is $5,500.

(Find out how a Roth IRA can make you a millionaire here.)

Step 9: Max out 401k investments

After you’ve maxed out all the other preferential retirement vehicles available to you (401k employer match in step 3, HSA in step 7, and Roth IRA in step 8) it’s time to go back to your employer and max out your 401k. Talk with your HR representative to find out how you can increase the percentage of your income that you have withheld from each paycheck for your 401k until you’ve put the maximum in for the current year. In 2016, you can save up to $18,000 in your 401k.

Read more about your 401k here.

Step 10: Invest your remaining income

You’ve reached the end! After figuring out what was happening to your money (step 1), saving up an emergency cushion and emergency fund (step 2 and step 5), paying off all of your debts (step 4 and step 6), and saving in all available tax protected retirement vehicles (step 3, step 7, step 8, and step 9) you’ve got money left over and want to know what to do with it! Congratulations on reaching the end of your financial goals so successfully. Now invest your remaining funds in savings vehicles for your kids’ college education (like a 529) or invest in the stock market to continue to build wealth.

It’s a long journey, and not every step applies to each of us. But the key to financial independence is following the ten steps above. You’ll suffer the occasional setback, but also the occasional windfall. There are people along the way who will criticize your plans and goals, who will tell you that in order to enjoy life you need to keep your 30% APR credit card balance at $5,000 and counting so you can spend more than you earn. And it will be challenging to tell them to go to hell. But if your goal is financial security and independence, the path forward is simple: follow the ten steps listed above.