A Practical Financial Checklist: From Cash Flow to Financial Freedom

Greetings!

With the new year coming up, I think it’s good to revisit the basics. In my practice, I find that people come to me because they are unsure on what the next step is with their money.

They’re busy. They’re juggling multiple things at once and it’s hard to know what direction to turn.

This Financial Checklist will help give you some sort of direction. Keep in mind, everyone’s situation is unique, and this may not be the right order for you.

1.) Cash Flow

I think this one can be universal. Everyone should take a look at least annually at what is coming in, and what is going out. If you don’t have a good handle on your cash flow it makes it nearly impossible to plan. Simply list your income at the top of a spreadsheet, list your savings, and list all of your expenses.

2.) Starter Savings Fund ~$5,000

This is to keep you out of debt.

Average car repair = $1,000 Average health-related expense = $1,300 Average home-related expense = $2,000 Total = $4,300 We round up to $5,000.

Unexpected expenses will come up and you need cash to fend them off, do this before worrying about your current debt so you can avoid going further into debt.

3.) Maximize Employer match

If you are still working for an employer and they offer a match that could be a 100% return on your money. At this stage, only contribute the amount to take advantage of the full match and nothing more.

4.) Payoff high interest consumer debt

At this stage if we have accumulated any consumer debt or higher interest personal loans we want to put everything we have towards getting rid of this.

This is likely hurting your credit score and costing you a lot in interest.

We put this one after the 401k match because typically a credit card might be charging you upwards of 20%. But on a 401k that money could be a 100% return if your employer matches (you contribute $1 employer contribute $1 = 100% return.

5.) Build Emergency Fund

At this stage we've eliminated all of our "bad" debt and have money working for us in retirement, we can start to build up a better emergency fund. The starter savings fund of $5,000 isn't going to cut it if we really get into a bad situation such as a loss of job or disability.

We like to see 3 - 6 x your fixed expenses in a high yield savings account. That way if you do lose your job, or want to change jobs, you have 3 - 6 months of cash to live off of before figuring out your next move.

If you are in or near retirement that could be closer to 24 - 48 months depending on your situation.

6.) Max Roth IRA & Health Savings (HSA) Accounts Now that we have an adequate Emergency Fund, we can start to take advantage of some accounts that have unique benefits to them.

Your 401k through your employer is likely money that is going on a pre-tax basis. In the future, when you withdraw the money in retirement you'll have to pay income taxes on that account.

You'll also be forced to withdraw the money once you reach a certain age referred to as Required Minimum Distributions (RMDs).

A Roth IRA on the other hand, goes in after tax and is 100% tax free in the future when you withdraw.

There is also no rule currently that forces you to take withdrawals (could be a nice tax-free legacy to leave to children/grandchildren).

A HSA account is even more unique in that it has a TRIPLE tax benefit. Pre-tax deduction for contributing. Tax-free growth on any interest earned in the account Tax-free withdrawal as long as the money is used for a health related expense.

Given the government puts a LIMIT on how much you can contribute to these accounts, that is a good sign that you want to take FULL advantage of utilizing these.

7.) Excess Savings to Various Buckets

We want to hit a target of investing 15 - 30% of our income (depends on age/goals) At this point, we would want to potentially increase the amount we are doing into our 401k and/or start investing into a brokerage account.

The 401k is going to have tax benefits but also has penalties if accessed before age 59 1/2.

The brokerage account also has tax benefits in that you are only taxed on the gains if you withdraw from the account after holding for 1 year at the Long Term Capital Gains Rate which is typically 15% for most people (and with some unique planning it can be 0%).

The brokerage account is also flexible in that there are no penalties for accessing the money prior to age 59 1/2.

8.) Save for the Kids

We want to make sure you are in strong financial shape before thinking about the kids. As a parent, that's tough but the adage of you have to help yourself before you can help others is true.

At this stage you can look into college accounts or just regular brokerage accounts for their cars, weddings, 1st down payment on a house, etc.

9.) Pay off Low interest debt

At this stage, you may have a car loan or a mortgage that is just bugging you. "I don't like owing anyone." This decision is usually driven more by emotion than math. If we look at it from an interest rate perspective where a mortgage may be at 3% for some and right now we can earn 4% in a high yield savings account then it's really hard to make this recommendation if you are trying to MAXIMIZE every dollar you have.

Financial planning sometimes isn't all about the math. But we shouldn't ignore it.

10.) Enjoy your life

Believe it or not, some people do struggle with spending their money. When you are wired to be a saver it's difficult to let go of your money.

But money can be a tool to enjoy and enhance your life.

So when it comes to your financial journey don't forget to have a little bit of fun along the way : )

Until next month, TF