 |
You’re finally at the coveted place known as “in the black,” which means you actually earn more than you spend. It’s taken hard work and discipline, but you’re well on your way to financial freedom. Because you bring in more than you pay out, you finally have the chance to do something positive with your money, like paying off your debts and building a successful future. But to do so, you’ll need to follow a financial timeline. Here are the areas you should focus on in order of importance.
1. Pay off high-interest debt
The longer you carry debt, the more money you’ll end up paying. Therefore, the first step in a successful financial timeline is paying off the money you owe. But not all debt is created equal, so it pays to pick and choose. The first thing that has to go is high-interest credit card debt. If you’ve been carrying a balance for a while, you could be paying 20% or more. Since you’ll probably never find an investment that provides you with more than that amount in interest, there’s no sense saving money until you’ve completely paid off this debt.
2. Pay off additional debts
Additional debts that should be paid off, but on a different timeline, include student loans and mortgages on first homes. Typically, these loans have two things in common. First, the interest on them is tax-deductible, so it can pay to have that deduction in April. Second, the interest, especially on student loans, tends to be lower than on credit cards. That means you have a choice to make. If you’re able to safely make more interest on a given investment than the amount of interest you’re being charged for your student loan, it could be wise to invest rather than pay off the debt. This way, the interest you generate will pay off the interest on the loan and eat away at the principal. And once you’ve paid off the entire loan, you’ll still have the principal from the investment to work with.
3. Set up savings
There’s no hard-and-fast rule for how much you should save. If you’re like most Americans, you don’t save at all, and that’s not a good thing. If that’s the case, try to put aside 10% of your income. If you’re already saving 10%, try to squeeze a few more dollars in. But remember: The number isn’t as important as the circumstances. If you’re a single guy without a lot of responsibilities, you’ll probably want to save enough for three months of unemployment in case the worst should happen. On the other hand, if you’re a family man, you’ll need to put away a larger chunk because children and a spouse could mean many more unforeseen expenses.
4. Plan for retirement
This is the big one, and most guys don’t do it early enough. The fact is that you’re never too young to start thinking about your retirement. If your office doesn’t have a 401(k), go to your local bank and set one up. If your employer matches your contribution, put in the maximum and take advantage of the free money. If your employer doesn’t offer this, ask your tax adviser how much you should contribute; the money you sock away for the future won’t go into the hands of the IRS.
5. Build an investment portfolio
This is where you’ll want to put the rest of your money. In all likelihood, it’ll be your biggest sector for growth, because savings and retirement funds alone probably won’t cut it. Think of it this way: Your retirement money should give you enough to survive when you stop working, while your investment money is the extra that will allow you to really enjoy that time. And the bigger the pie, the faster you can stop working and start enjoying life.
To make the most of your portfolio, you’ll need to put money in stocks and bonds. If you’re young and you can afford it, your investment portfolio should be an aggressive mix of risky and safe bets because you can always build back your losses should things go south. If you’re older and you started late, however, concentrate on growth with as little risk as possible; that way, you won’t find yourself talking to the guys at work about getting your AARP card.
As you can see, with the exception of paying off your debts, your financial timeline will be an ongoing commitment. The more room you have to operate in your monthly budget — that is, the more money you can channel into savings and investments — the more money you’ll have later. If you plan wisely, a bump in the road will be just that — a bump. But if you fail to put money away, your plans could derail. Remember: The more money you’re able to put away today, the sooner you’ll be able to claim your financial freedom and start enjoying all your hard work.
Other Post Entries You Might Enjoy!
No Responses to “Financial Timeline”
Care to comment?
You must be logged in to post a comment.