Dear (Late) Starter,
I’ve been studying financial planning seriously for almost two years now and I have a lot of knowledge from prior to my decision to change careers from engineering to financial planning. Hopefully I’m on my way to becoming a great planner in the future, but I’m not there yet. I don’t have all the answers, but below I’m going to give you 5 actionable, hopefully not overwhelming, steps to take towards a brighter financial future. You can dive into each individual concept as you are able to. This is meant to be a starting point for your journey, not everything all at once.
- You have to start.
- Get a clear picture of where you are today.
- Understand the direction you are currently going.
- If you need to make changes, start by targeting the big things (I’ll give you my top 5).
- Keep going and don’t stop here.
Hopefully this will be helpful for you! Wishing you great success in your journey towards financial independence,
Patrick
Step 1: You have to start.
You have to start by forgiving yourself and looking towards the future. What happened in the past can’t be changed. You can reflect on some of the mistakes that you may have made, but try not to dwell on them. What you can do is tell yourself that you are in control of your actions moving forward and that progress will come one step at a time. However, I find it important to emphasize: you have to start.
Step 2: Get a clear picture of where you are today.
Before you take any actions, you then need to get a clear picture of where you are today. You need to understand what you own and what you owe. Here are a few questions to get you started:
- Do I have savings for a rainy day?
- Do I own a home?
- Do I have a mortgage, a car loan, student loans, etc.?
- Do I have a retirement or pension plan through your work?
- What protections do I have in place for myself and my family?
If you were able to fully flesh all things you own and the things that you own, you could total that up. What we would have is called a balance sheet or a net worth statement. I think it’s also worth spending a little time thinking about how you got here – consider what the major decisions you’ve made are and perhaps how some of those decisions were influenced (family, friends, society, etc.).
Step 3: Understand the direction you are currently going.
The next thing you need to do is understand the direction you are currently going. How does your income compare to your expenses? There have been many others that have done work on savings rates. You might consider checking out: The Shockingly Simple Math Behind Early Retirement. Even if you aren’t trying to retire early, it shows you the effect of savings rate on your ability to retire from a general sense. Hold on: if you’re looking at those numbers and thinking that they look too scary, there are 3 things that can help:
- Those numbers assume a 0 starting point. If you have done some things right along the way, you’ll need to factor those in.
- Social Security is not included – it’s likely to be there in some form for years to come but that does not mean we should rely on it as our retirement plan.
- We haven’t made any changes – YET. Check out the next steps.
Step 4: If you need to make changes, start by targeting the big things.
Now that you understand where you are and where you are going, ask yourself, “Am I OK with that? Do I need to make changes?” If you find yourself looking to boost your savings (rate), start with the big things. Many people talk about the big 3 expenses and I’ll give you 2 other things to consider. For any of these, take what is valuable for you and discard what is not. Try to be intentional about what is relatable to you. For each section I’ll give you a few questions just to get your mind going.
- Many talk about how housing is often our biggest expense (mortgage, maintenance, tax, etc.). I think it’s important to recognize that it might not be possible or make sense to make adjustments here. However, I do think that you need to ask yourself if you can afford the home you live in AND you are getting appropriate value from your living situation.
- Does where we live make sense?
- Does it make sense to downsize as kids move out?
- Are we utilizing our space well (does house hacking make sense for us)?
- Do I see a career move coming that changes the way I might look at my next housing decision?
- The next one is food. This expense is usually immediately actionable. Food is a constantly recurring expense and it isn’t contingent on selling or renting out a large asset to change.
- Are we eating out more than what we’d like to?
- Are we wasting food?
- Could we be eating differently/better?
- This one is a bit different: could I be earning more if I didn’t spend so much time on food preparation?
- The last of the “big 3” is transportation. In America, it’s not uncommon to have 2 or even more cars in a household. This is another area where it might not make sense to make an immediate change.
- Are all of your vehicles providing value for you?
- Do I understand all of the costs that go into owning each vehicle? (charging/gas, parking, maintenance, etc.)
- Have I considered alternatives? (public transportation, e/bikes, etc.)
- My first “extra” is to look through all of your recurring expenses. It’s pretty easy to forget about some subscriptions and you might be able to find some savings here. It might seem small, but the math works out that $100/month in savings is roughly about $30,000 less that we need to save for that “retirement number.” Don’t stick to that number, just use it as a guiding principle.
- When was the last time I shopped around for better insurance rates?
- Am I getting good value for my phone and internet charges?
- Do I have Netflix, Hulu, and Disney+ simultaneously and do I need them all right now?
- Do I have any memberships that currently go unused? (e.g. gym)
- My other “extra” is often overlooked and might require some thinking on your part. To this point, we’ve only discussed lowering expenses, but the other way to increase your savings rate is to increase your income. Make sure that you are earning what you deserve and taking advantage of your benefits because it can go a long way.
- When was the last time I got a promotion/raise?
- If I moved to the company down the street, would I be making drastically more?
- Am I covering expenses for career progression that could be included in my compensation?
- Am I getting full use of my benefits? (retirement plan matching, HSA contributions, ESPP, etc.) This is part of your compensation.
Step 5: Keep going and don't stop here.
If you made it this far, you’ve likely had a lot of progress. We are at my last step, which is actually: don’t stop here. Tackle each step one at a time until you are at least in the place that you want to be. Here are some more suggestions as you continue on your journey:
- We haven’t talked about investing at all. You may not be ready for that point just yet, or you may be ready to look into it further.
- Find a community of like-minded people that will support you on your journey. (might I suggest the CUtFI Facebook group?)
- Stay open minded, yet skeptical. Don’t assume that anything is gospel, but don’t rush after the latest trend. Keep learning.
