Money Management Series "Part 1" Recap
In Part 1 of this series, I discussed the importance of getting a grip on how much money has flowed into and out of your life. You had two choices on getting started: 1) Calculate your net worth or 2) Calculating you lifetime after-tax income and compare it to your total present-day account values.
We start here to paint a very clear picture and teach you just how inaccurate your lifelong story about money truly is. You need to understand what your previous money management routine has yielded because it creates an excellent way to track where all your money has gone over your earnings lifetime.
The first step of this program was to find out how much your worth. Now what?
What To Do After You've Calculating Your Net Worth(less)
Perhaps in calculating your lifetime earnings, you realized you've saved none of it. Maybe you are even in debt. In that case, congratulations---you have managed to actually spend more money in your life than you have ever even earned. That ends today.
The focus is on getting back to neutral. Back to zero. For most people, a worthy place to start is actually eliminating a negative net worth.
Whether you have mortgage debt, couch payments, car payments, or whatever the hell else you can finance in this day and age, if you have a negative net worth the focus needs to be breaking even as quickly as possible.
I am not going to get into good debt vs. bad debt. That is a bullshit conversation for multi-millionaires to sip mixers and jeer about. If you are in debt, and have a negative net worth, there is no such fucking thing as good debt vs. bad debt.
It's all bad debt if you owe more than you have or make. If you are living beyond paycheck to paycheck, stay away from the bullshit advisement and arguments about how "houses are good debt" and "cars are bad debt". It's all complete and utter nonsense. Stay away from it and get back to even. Soapbox over.
Begin with the debt snowball or debt avalanche methods. They have been hashed out in great detail and people love Dave Ramsey's Total Money Makeover book for strategies on how to kill debt as quickly as possible. To that end, I will not repeat what others have already outlined better than I. Go read Dave's book or Google search 'debt snowball' or 'debt avalanche'.
Now Make a Plan For Saving
Whether you already have a positive net worth, or you followed the advisement outlined above, you need to develop a plan for where to direct your savings.
You certainly could direct it into a savings account. Perhaps increasing your retirement contribution percentage is now feasible. Maybe you want to open an IRA or a Roth IRA. You have options.
Age old wisdom advises 3-6 months worth of expenses in your savings account. Above and beyond that, your income or savings can be invested. There are many advanced strategies such as saving your 3-6 month emergency fund in your Roth IRA. For now, let's keep it simple and easy to follow.
I personally believe that if you previously held significant debt, teach yourself the discipline it requires to save a 12 month emergency fund. If you have had a positive net worth for years or decades, then you can be more aggressive with a 3 month emergency fund.
The amount you should save in the fund is based on total monthly expenses for a given time period. If you spend an average of $2,000 per month, and you wanted to have a 6 month emergency fund, you would need to save $12,000 ($2,000 a month x 6 months). Pretty simple stuff.
It may be boring as hell, but eliminating all debt in pursuit of attaining a positive net worth---even if it's only $1---is an essential second step after you have calculated your net worth or lifetime earnings and savings as outlined in Part 1 of this series.
Part 2 of this series is all about understanding your financial picture. It is about finding out what action steps you need to take after you discover your net worth or lifetime savings and earnings as outlined in Part 1 of the series.
Thus far in the series, we have covered these basic steps:
Step 1: Calculate your Net Worth or Lifetime Earnings relative to present-day savings
Step 2: Attain a Positive Net Worth and Start an Emergency Fund
In part 3, we will discuss what to do once you have established and completed Steps 1 and 2 above.
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.