One of my favorite things to do is to talk to employees or honestly anyone about their finances. I find that some of the best guidance I give comes from other people. I also get a lot of insight as to why people find themselves constantly in a financial hole.
As I was doing a series of financial consulting appointments, I started to notice a trend in people wanting to make the right financial decision but not in the right order. My mantra to all is to look at building your finances like building a house. If you do not lay the right foundation, your house will crumble at the first sign of stress. For instance, if you start paying off debt with no savings, eventually life is going to happen and you will either have to stop paying on your debt to take care of the emergency or worse, get into even more debt because there was no cash to take care of the expense. Here are some steps to lay down a strong financial foundation:
1. Create and stick with a monthly spending plan. The greatest resource you have to help you achieve your financial goals is your income. If you do not have a written plan for how you are going to spend your income, you may overestimate how much you can spend and have nothing left over for emergencies. Having a monthly spending plan is an important foundation to your finances because you need to know how much money you really have to use towards goals. It will also give you insight into how much you need in savings and how much you can actually save.Consider using websites like Mint to create a realistic spending plan to account for your spending.
2. Have an emergency savings account. An emergency fund is a foundation to a great financial plan because it makes sure you can take care of the unexpected like paying your mortgage if you suddenly lose your job or replacing your transmission without having to go into debt. I actually label my emergency savings account as “debt free insurance.” I found labeling the account is a constant reminder to my husband and myself that the purpose of it is to protect us from having to use debt to cover emergencies. This also prevents us from getting tempted to use this account for non-emergencies. If your emergency account is at ground zero, break up your goals. First, shoot for a goal to get $1,000 into the account as soon as possible to cover minor emergencies and then set a goal of at least 3 months of expenses. Consider setting up automatic payroll deductions to reach your goal.
3. Pay off high interest credit card debt. For many that carry high interest credit card debt, they will save more money by paying off the 13-20% interest than they will make in an investment averaging 6-10%. No debt also means that your money can go towards your financial goals and not your creditors’ bottom line. I had a meeting with a wonderful young woman who was contributing regularly to a Roth IRA but was carrying credit card balances with over 20% interest rates. I told her the best investment she can make is to pay off her credit card. We used the DebtBlaster Calculator to come up with a strategy to pay down her debts. She was surprised that she could pay off her debt in less than ½ the time by paying off her higher interest rate first, adding an extra $100 a month and committing ½ of her average tax refund amount to her debt.
As you look to getting your house in order, make sure you lay a foundation that can withstand the test of financial stress. It may not be fun. However, your foundation will help you withstand the financial crisis that will inevitably come and help make sure that whatever else you build does not buckle at the first sign of financial stress.