Financial security is something nearly everyone strives for, but when it can seem to be such an overwhelming goal that it’s hard to know where to start. It doesn’t have to be.  By taking a few simple steps, you can put yourself on the path of financial security
First, create a “starter” emergency fund. This is a fund that you will use to pay unexpected expenses instead of using your credit card. Set a goal of saving a certain amount from each paycheck. Pay the minimums on your credit cards to free up some cash for this fund. If you have a few unwanted items, sell them on eBay or have a garage sale. Don’t eat out until you have created this fund. You will use a money market or savings account to hold these funds.
Second, while you are creating your emergency fund, cut back on the amount you are saving in your retirement plan. Put in only the amount that your employer matches. This is free money, and you want to make sure you get all you are entitled to. However, it is important to build that emergency fund first.
Third, pay off debts, one at a time. This is often the most difficult and overwhelming part of establishing financial security. To get started, list all your debts by balance and interest rate. Start with the smallest ones first, and as you pay off those balances, add that amount to what you are paying on the next balance. If two balances are similar in size, pay off the one with the higher interest rate first. Keep on doing this until your debt is paid off. This may take a long time, even years. But it is a very important step in achieving financial security.
Fourth, once you have your “starter” emergency fund established and your debts paid off, turn your attention to creating your long-term emergency fund. This is a fund that should equal between three and six months of your living expenses. This will provide you with the resources you’ll need in case of a big emergency, like the loss of a job. Again, set a goal amount to save from each paycheck until you have enough accumulated. Deposit any bonuses or tax refunds your receive in this account. Because this is an emergency fund, you’ll need it to be liquid. A money market fund or a savings account are good choices.
Fifth, concentrate on fully funding your retirement savings. Back when you were in debt and didn’t have an emergency fund, you reduced your retirement savings to the amount your employer matched. Once you are out of debt and have some savings, you should ramp up your retirement accounts. Put as much as possible into pretax savings like a 401k or a deductible IRA. You may also want to consider Roth options that are available to you. If you can’t afford to put in the maximum right away, just put in as much as you can. Each time you get a raise, increase the amount you are saving.
Sixth, pay off your mortgage. Once you are maximizing your retirement savings, you can direct future savings towards paying off your house. There are many strategies for doing this. Just put together a strategy and get going. You can use your home equity to pay for large purchase, like cars. Doing so may help you to realize some tax benefits.
Seventh, create college funds for your kids. This should be a lower priority, because you can use your home equity or student loans to pay for college if you need to. However, because Indiana offers a very attractive tax credit for funding a CollegeChoice 529 plan, you may consider directing some money there while you are paying off your house.
The final step is to enjoy your financial independence. You are debt free and have money saved for both emergencies and for retirement. You have some college savings and options for paying for things in the most advantageous and tax efficient way possible. All of the work you put in to achieving your financial security is paying off. Now is the time to treat yourself to the indulgences you’ve been putting off or donating money to causes you believe in.
As with many large projects, achieving financial independence can seem daunting. Following these simple steps will start you down that path.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC