When it comes to taking control of your personal finances, we want to make it easy for you. This personal finance flowchart walks you through the most efficient way to take control of your personal finances, no matter what your financial situation.
The key components of this personal finance flowchart are:
- Emergency Fund: A fund you should establish and fund up to a certain dollar amount to ensure you are prepared for any unexpected events. If you are working for a company, 3-6 months of living expenses should be sufficient. If you are self-employed, a little more cushion at 6-8 months of living expenses is recommended.
- Company 401k Match: If your company offers a 401k match, great. It can be tempting to start contributing to your 401k before funding your emergency account, but your emergency count needs to be funded first to ensure you’re prepared to handle the unexpected. Once you’ve funded your emergency fund, start increasing your 401k contribution until you reach the employer match – it’s free money!
- Unpaid Debts: While funding your emergency fund and increasing your 401k contributions up to the employer match, make sure you are making your minimum payments on any debt you have. Now comes the time to add up all your unpaid debts and plan to attack them using the snowball method (paying down on your highest interest debt first) or the avalanche method (paying down on your highest balance debt first). Choose a debt repayment method that works for you and you’re likely to stick to, then begin making extra payments above the minimum you owe each month. If you are able to, make sure your extra payments are applied to principal instead of interest.
- IRAs: You’ve cleaned up your finances a fair amount by this point and you can begin to increase your IRA contributions to the annual limits. Opening a ROTH IRA and Traditional IRA account through a single brokerage can be a great way of doing this. ROTH IRA contributions are made after taxes are taken out, so they grow tax free forever. Traditional IRA contributions are made before taxes are taken out, but they grow tax-deferred, meaning you are not taxed on the gains until you withdraw your funds at retirement. There are penalties for both investment vehicles if you withdraw your funds before retirement.
- Company 401k Max-out: Once you’ve funded your emergency fund, taken your company 401k match, paid down on consumer debts, and maxed out your IRAs, a good next step is to increase your Company 401k contributions to the annual maximum set by the IRS.
- Other Investments: With the efficient personal finance strategy you’ve adopted above, you can turn your attention to other investments – stocks, bonds, treasuries, real estate, business ventures, side hustles, and more. There are really an endless number of ways to invest!
That’s it! When you focus on personal finance, it’s incredible what you can achieve. Give consistent effort, don’t get discouraged that things take longer than you expect, and allow the effects of your growing wealth to take place. Remember, you are in it to improve your financial health over the long term and nothing happens overnight.