1) Emergency Savings
Everyone should have a minimum of 3 months emergency savings. 6 months is better.
Your goal here is to cover every single expense you have, on average, during a given month. This is rent/mortgage, groceries, going out, gym, car insurance, etc. etc.
Most people live paycheck to paycheck; this is the reality in America today. Another sobering reality is that emergencies happen, and they don’t call you a month in advance to tell you when they will happen.
An emergency savings account is an essential financial planning tool for everyone.
2) Debt Management
A couple things come to mind when thinking about debt management:
- Live within your means – this should be obvious, but in practice it’s hard to do for many people. Life happens and sometimes you break your budget. The point is to be aware you’re breaking your budget. A great tool to figure out what you’re spending every month is Mint.
- Plan for the unexpected – this goes back to point number one, have emergency savings ready for a rainy day, because they do happen. Your car could cost you a couple grand, or maybe a random medical expense, or maybe a dinosaur plows through your house (ok kidding on that). Having planed for known expenses and allocating some money for the unexpected will give you a cushion to avoid having to go into debt by having to raise money quickly for something else.
- Understand the cost of debt – money is not free. The cost of debt is the interest rate and the time of repayment associated with it. Take the time to understand how your credit card calculates interest on your balance or how your mortgage payment may/may not fluctuate. A critical point, often overlooked, is whether or not the interest rate is variable or fixed. KNOW THIS. All this info can be found on statements, calling your banker or a simple Google search.
3) Retirement Savings
I’m betting you don’t want to work forever. And also, the reality is, many of you will physically NOT be able to work forever. Scary thought right? You better have a plan…
Everyone needs to plan for retirement. If you retired today and needed 20 – 30 years of savings to cover your current expenses, would you be able to do it? What if you get really sick and need to pay for care? What if your spouse dies?
All these questions have one thing in common. They deal with the unknown. We’ll never be able to know the future but by actively thinking about scenarios, we can plan.
Plans are useless. Planning is everything.
Honorable Mention: Budgeting/Expenses
How many of you can tell me, on average, what you spent per month over the last 3 months across all major expense categories?
If you can, great! If not, you need to know. Every one of the 3 points above require having at least a general idea of what you’re spending per month.
Figuring out where your money is going is the first step in taking control of it.