Financial Intention

The Financial Path to Take: Crushing Debt to Simple Investing

I’ve been watching a lot of financially successful people for a while now, and for every single one of this is the financial path to take. Chances are if you’re going to be successful you’re going to walk this path. If you’re on this route right now, you may be at square one or square five. If you’re not currently following this path, here is a map for you, enjoy!
You may have extra stops in between, but the story arc is the same across the board. We’ll call it the Financial Hero’s Journey.

Checklist Syndrom

I’ve complained before, and I’m sure I’ll complain again, but it is too easy for us to treat life like a checklist. We are set up to follow others mindlessly, and soon enough we end up somewhere we don’t want to be. The same thing can happen with finances. While I prescribe this route for most, I also encourage you also to look outside of it.
I am currently exploring other options outside of this path right now. It’s not the most comfortable financial situation to be in, but it’s important to me that I do this. Soon enough I will travel along the Financial Hero’s Journey again.

Step #1: “Begin with the end in mind” – Steven Covey

Above is the second habit of highly successful people according to author Steven Covey. The first is focusing on your circle of control here. As far as your financial journey is concerned, it means that you need to have an idea of what financial success looks like for you. For some people, this will look like being debt free. For others, it will mean buying expensive things. The readers of this blog will most likely think adventure.
Regardless of what the end looks like, make the image of the end as detailed as possible. Right down to the expenses but as high level as the experiences. Why do you want it?

The Massive Advantage to Having the End in Mind

The advantage of having the end in mind is that you can avoid most financial disasters. You can easily spot what a bad investment is for you, even if others around you are investing. It will also help you find great investments that no one else sees. For me, buying a house for myself or nice car are bad investments. They don’t bring me to my goals any quicker. Even though most of my peers are looking to do this, I can avoid it.

Step #2 Eliminate Any and All Debt

Debt is by and far the biggest detractor from achieving financial success. The reason for this is that it is indicative of one living beyond their means. Someone who has or is creating debt is living a life they can’t support, and in the end, it can end up in financial ruin. If you are in debt, you should find a way to tear it down. There are entire blogs and fantastic resources that will help you with this mission.

Should you crush all debt before moving on?

That’s up to you. My blanket answer, which will adjust from situation to situation, is that if the interest on the debt is higher than 7%, you should focus on it before moving on to the next steps. The reason for this is that the stock market (which is the next best investment) historically returns 7%. If one’s debt is growing faster than the alternative investments, then it will eclipse the investments and one’s net worth will be negative, which is bad news bears.

Step #3  Create an Emergency Fund

Most Americans can’t cover a $1,000 emergency expense. If they can’t do that, how are they going react if they lose their job or have a larger tragedy? Instead of ignoring the possibility of disaster embrace it! Prepare for it now, before it’s too late. Save between three and six months of expenses in cash. I look at saving 3-6 months of expenses rather than income because those are two very drastically different numbers for me.
Nine times out of ten this emergency fund will be able to rescue you from sudden financial terrors. Don’t touch it, and don’t invest it.

Cash is king when disaster strikes.

The majority of the time money isn’t something that you want sitting around. The reason for this is that it loses at least 3% to inflation every year. When you’re hit with an unexpected event, it’s great to have around. However, outside of that 3-6 months expenses the rest of your savings should be in an account that hedges against inflation. So keep your non-emergency fund invested in something that will return over 3% in the long term.

Step #4 Max Out Tax Advantaged Savings Accounts

Taxes are a huge portion of your expenses. Most people don’t realize it, and worse don’t account for it. If you are making any serious amount of money through work or investments, which you probably are since you’re reading this snazzy financial blog, then you might be giving a quarter to a third of your income to taxes.
This fact isn’t bad! Taxes can do some magnificent things. Personally, I love that I can visit public parks, libraries, and drive on decent roads.
Instead, think of your tax-advantaged accounts as the coupons of the tax world. If you were about to buy a television and you had a $100 off coupon in your hand would you use it? Hell yeah, you would! Do the same with your tax advantage accounts.

Where to start? The 401k

Your employer probably has a 401k program that in which you can participate. 401k’s are even more powerful because most of the time your company will match your contribution. Invest as much as your employer will match. If they say “We will match 50% up to 6% of your income,” then you should invest 6% of your income.
A 401k is an account where your pre-taxed dollars can be invested and grown without being taxed. Pre-taxed dollars are fantastic because it will help your investments grow at an accelerated rate. You do have to pay taxes when you withdraw the money. However, this is perfectly fine because A) you will be in a lower tax bracket in retirement and B) your money has grown so fast due to the lack of taxes in the growth period that the taxes are a drop in the bucket.

Don’t Worry! There’s an Account for Those Who are 401k-less

Perhaps you’re saying “Kraken, I don’t have a 401k with my company because I’m a tutor for my university.” That’s fine there’s a tax advantage account for you too. It’s called a Roth IRA. A Roth uses your post-tax money to invest in tax-free accounts. What that means is when you go to withdraw the money in retirement, you don’t have to pay taxes on it. Again, another great account to help save on taxes. Invest the maximum amount you can in this account! Ideally, the money would be stashed straight from your paycheck, don’t even let your checking account see it.

Step #5 Start Investing in Your Future

While most of the previous steps are investments in your future in some way shape or form, this move is more direct. I recommend you open up a Vanguard account and start saving for whatever your end goal is. If it is less than five years out, I suggest you put it in something bond heavy. If it is farther out than that, I recommend to let it sit in an index fund.
There is a fantastic series on stocks that I recommend you read if you are interested in this. The long and short of it is get a Vanguard account and save as much as you can in there.

A Unmeasurable Alternative

Another option is investing in yourself. This act is an often overlooked investment. Some even undervalue it due to the Return on Investment (ROI) is harder to calculate. There are loads of advantages, though. These opportunities are the educational intention and can be critical in helping yourself to a higher place in life. Some examples aside from books and college are online courses to learn something you want to know, language classes, learning to cook, networking events or conferences, and more.
There are also free versions of this such as taking the time to read blogs, listen to podcasts, watch something educational, or teaching yourself something new.

Step #6 Spot Check Yourself

Every six months or so you should reassess your financial direction and if you still want to head that way. Reassessment is necessary because life evolves and our goals change. Life presents us with new information, and it’s always good to take a step back. We should intentionally travel where we want to go.
I took a step back and realized that my job wasn’t taking me where I wanted. If I had taken time in college to spot check myself, I would have probably realized I didn’t want to be a typical engineer.

Spot Check that Emergency Fund Too

Also, make sure that your 3-6 month emergency fund still covers your expenses. Lifestyle inflation is a dangerous temptress. Over time our lives change, things get more expensive, and our emergency funds need to reflect that. If you’re still as frugal as you can, and expenses still rise then make sure to update your emergency fund accordingly.

Persevere Through the Hard Times

Be warned! Don’t do this too often. If working towards your adventure gets hard don’t decide to quit because of that. Everything worth having is hard. If you’re still not happy about it in six months, then it might be time to move on. Successful people pursue through the hard times. If you’re reading this blog, then you have what it takes to be a successful person.

Parting Words

If you stay vigilant about your finances and follow these steps, financial success will find its way to you. The prescription above may seem like a lot, and it is, but you don’t go from zero or negative net worth to achieving your dreams overnight. Eventually, these steps become old hat, and you will get bored of managing your finances. I know I do, and I write a blog about it.
You probably already have a sense on where you fall in this Financial Hero’s Journey. Next thing to do is follow the next smallest step. Maybe it’s just opening up a savings account or setting up money to transfer automatically. Don’t overwhelm yourself with too many choices and avoid any action at all.

Let me know

As always feel free to contact me if you want help or leave a comment below. If you don’t mind sharing, where are you on this path? Are there any steps along the journey you think I left out? What is your next smallest step you can take? When do you plan to make it?

Photo Credit: Cathy Whitfield, Chris Potter, & Kraken Fireball

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