My core clientele are busy professionals and entrepreneurs. They are ready to get serious about building their financial future, but don’t know where to start, and don’t have time to figure it out.
Maybe I’ve been spending too much time in mine, but I think it’s a lot like tending a garden, and there are 5 easy steps:
- Prepare the ground
- Start your seeds early
- Water the plants
- Pull the weeds
- Be patient
Step One: Prepare the Ground
Gardeners don’t just luckily come upon a flat bed of topsoil and start planting. Preparations need to be made: clearing the land (or part the lawn), and loosening up the soil (tilling). Your finances are the same way: you need to cover the basics before you can really get started. So, what are the basics?
- Positive Cash Flow. Your income must exceed expenses, every month. There must be something left to save or invest.
- Emergency Fund or Cash Cushion. 3-6 months of basic expenses is fine for many, but if you are the sole breadwinner for your family or have an unstable job, 8-12 months is better. Basic expenses means you can cover your mortgage and groceries, not that you can go on vacation.
- Debt within Reason. If you have credit card debt, you need a plan to pay it off. Student loans and mortgage are an investment, but stay within reason.
- Adequate Insurance. Everyone needs health insurance. Parents (or others with someone dependent on their income) also need life insurance. Disability and Long Term Care insurance should be considered, but are not necessities in the same way.
- Estate Planning Basics. If you are a parent, do you have a will?
Step Two: Start Your Seeds Early
If you wait for a beautiful day in May to start planting, you’re too late. Start seeds indoors in February? Now you’re talking. A productive garden may be within reach.
The point is, if you start young, before you feel like you can “afford” to save, you are ahead of the game. For example:
- Save for retirement when you begin working
- Start a 529 College Savings Plan when your child is born
You’ll most likely never regret saving when you are young.
Step Three: Water the Plants
Growing your garden requires a little ongoing maintenance. A thorough watering once every three months is better than nothing, but no where near as effective as watering a few times a week. How does this apply to your financial garden?
- Pay Yourself First. Get in the habit of saving regularly by saving a little – even 1%; you can always increase it later – from every paycheck.
- Automate. Never miss a bill payment and and set regular transfers to savings online.
- Save in Your Retirement Plan. Take advantage of retirement plans at work, if you have one.
Investing consistently over time can reduce the risk of market timing, or investing at the wrong time. It’s always a good time to invest if you do it consistently over time.
Step Four: Pull the Weeds
This is the other side of garden maintenance: you don’t just need to feed it water and nutrients (or new money); you also need to keep an eye on it, and prune the branches as needed. What does this mean for your money?
- Measure. Are you making progress on your financial goals?
- Review. Take a look at your cash flow (income and spending) at least once per month. Did you spend more than you planned? That’s okay, awareness of where your money goes will help keep you on track for next month.
- Rebalance. Look at your investment accounts in detail at least twice per year. How are you invested? Is it consistent with an appropriate asset allocation? How are you doing in comparison to the market?
- Consider Costs & Tax Considerations. If you are using mutual funds, are their expenses competitive? Did you have any taxable events (realized capital gain or loss, stock option exercise, etc), have you considered the tax implications, and will you be prepared when you file your taxes next year?
You can do it yourself, but this is the step where professional assistance (from a financial planner or advisor) can be most helpful.
Step Five: Be Patient
Let’s face it, there is no instant gratification in the garden. The first year may not produce the results you want.
It can be frustrating to make sacrifices to save money or pay down debt, and to see very little progress over a few months or even a year. Just accept that it takes time to move the needle.
Finally I think it’s important to remember the reason we do all these things. Confidence comes from knowing:
- You’ll be okay if you lose your job
- You have the financial freedom to pursue something new or work only as long as you want to
- Your kids will be okay if something happens to you
- Your kids can afford to go to college