“I just get nervous because I’m making all these decisions myself since it’s the cheapest way to do it right now, and since I’m not super educated on it. I just don’t know if I’m doing the right thing.”
I got this text from a friend last week. It all started out with a seemingly simple question, ‘Where should I check my credit score?’ and quickly snowballed into a series of anxiety inducing, ‘What do I do next?’ questions.
I assured my friend, as I assure anyone experiencing ‘adulting anxiety’ that everything she was doing and stressing over was leaving her better off than she was before.
More than anything, beginner financial planning is about getting started.
It’s better to dive in, even if you make a few bad choices along the way, than it is to sit on the sidelines worrying that you won’t make the best possible choice.
You can kick off with these steps…
Even if you don’t choose the best possible funds within your retirement account or you wind up paying for a credit score that you could have gotten for free or you don’t get the absolute lowest rate on your debt, chances are, you’re still leaving yourself better off than if you had done nothing.
Ideally yes, you want to make the best choice to maximize your savings and returns, but if that search for an often-elusive “best” is causing crippling inaction, it’s not worth it. Because you know what’s more valuable than the best deal? Time. And time is one thing you can’t buy back or renegotiate.
[clickToTweet tweet=”Time is more valuable than the best deal. You can’t buy it back or renegotiate it. Start now!” quote=”Time is more valuable than the best deal. You can’t buy it back or renegotiate it. Start now!”]
Before you can make a plan for how to move forward you have to know where you stand. Not some idea of where you stand, but exactly what numbers you’re working with and how they add up.
Start by taking financial inventory- credit score, debt load, account balances, assets, net worth. I personally consolidate all of my finances with Personal Capital’s free tracking software so that I can get a clear visual of where I stand financially at any given moment.
Think of your finances as a map. After you identify the “you are here” mark, you need to choose where you want to go. Only once you’ve marked both the origin and the destination can you decide on the best route between the two – same goes for your finances. Make a list of your goals, the relative timeline and cost for each, and then prioritize from top to bottom.
Grab a free copy of my goal setting and getting workbook to help you stay organized and keep track of your progress.
If your origin is your current financial inventory and your destination is your list of goals, your budget is your route map. Before you can take the next step on that route though, you need to draw it out – that’s where budgeting comes in.
Build a budget that works for you- a zero sum budget, a percentage budget, a cash only budget- the only requirement is that you remain above the make or break number- make or break being your essential cost of living plus savings.
Committing to reducing spending and/or increasing income until you hit and surpass the make or break number is the only way to start making progress. If you haven’t read how to budget without a budget please do that first – that is step one. This post is about what you do in step two – financial planning with what’s leftover.
Once you’ve taken your inventory and defined your make or break number you should have a pretty clear idea of how much money you have left over to tackle that list of prioritized goals, the hard thing is knowing where to begin. Do I pay off my debt? Do I contribute to a retirement account? Do I pad my emergency fund? Do I save up for a down payment? There are so many goals and seemingly never enough money to fund them all.
This is where that “adult choices anxiety” starts kicking in. Just take a breath and remember, whatever you choose will (more often than not) leave you better off than you were before.
Financial goals generally fall into one of four categories…
Ideally, you can fund all of your goal categories in addition to covering your monthly expenses- designating larger percentages of income to the goals you’re pursuing most aggressively. Unfortunately, reality isn’t always ideal, and income restrictions necessitate the prioritization of some financial goal categories over others.
I recommend starting with emergency savings and debt payoff. Building a buffer of at least $1,000 is step one in my book (though eventually your emergency savings should add up to around 6 months worth of living expenses). Once you’ve got that 1k buffer, start dividing your money between emergency savings contributions and debt payoff. If you can sneak even the tiniest bit of retirement savings into the equation- I’m talking as little as $50 per month- that would be ideal, especially if your debt is low interest.
Now don’t forget about those short and medium-term fund savings either. If you’re a young professional, you have a lot of life to live between now and age 59 ½ – whatever your “American Dream” consist of- home, family, travel, etc.- will need some funding that’s not tied up in retirement or set aside for emergencies only.
If you find yourself stretched thin in an attempt to fund all savings categories, I urge you to seriously consider ways of increasing your income. There are only so many ways you can save money and cut back on your day-to-day expenses. Earning potential however is unlimited, and the freedom and flexibility that comes with increased income is a game-changer for your financial and life goals. I’m speaking from experience. Seriously, game changing.
At the end of the day, beginner financial planning really comes down to a few basic, common sense steps – earn more, spend less and save in a way that aligns with your greatest goals.
If you’re following those central tenets, don’t stress, you’re on the right track. No need for “adult-choice anxiety”.