Last time, we organized our income, expenses, debt, and investments. And now you’re probably wanting to give up because it seems hard or more likely boring. But don’t give up yet!! We’re truly on step 2, which is the end of this process!!! See, quick and easy!
What Can You Change?
For step 2, we are going to look hard at what we can change. Whether that is a mindset of living in the moment with no care for the future or taking care of everyone else with no thought for yourself. Maybe you’re just risk adverse and investing seems too hard. No worries!! I’ve got you.
You’re going to decide what is the most important for you. That’s right you’re setting your own goals. There is advice everywhere on what should be important to you, pay down your debt with the highest interest rate vs. the highest loan amount, live for the now and save when you hit a certain income or live frugally now so you can enjoy tomorrow (FIRE movement). Whatever you want to do is up to you.
But I’m here to help you. If you are not sure what to do, you can schedule a consultation with me or you can read through my blog posts and gather the information and make your own decision. There is no wrong way to do this, other than doing nothing! Start now, even if it isn’t perfect, it’s a start!
How to Determine Your Goals
I’m going to give you a few options and tell you what I’ve done but you’re going to decide what is most important you. Do your research and make a decision that you can stick to long term. There are no short cuts in investing at MidLife.
Think about what is most important to you: paying off debt, early retirement, living a balanced financial life or changing your career. Get out a piece of paper and write down all 4 headings. Underneath, write down what each one means to you. Keep writing until you’re satisfied you know what each heading means to you personally.
What is Most Important to You
Next, you’re going to determine which ones are most important (if you’re struggling, rank each item under every heading and then add up which ones have the highest rankings) and make a plan based on what you value most. Usually people will find they land in 1 or 2 categories and that is where to start!
This doesn’t mean you only need to work in these areas, it is just your starting point. Pick your most important topic right now and start your plan. The biggest thing to do is just start. It doesn’t have to be perfect, you just need to start working towards the life you want.
My Goals
For me, I want to invest to retire early and become debt free. This was easy for me to determine after I wrote down a budget, calculated all of the income, debt and expenses I have. I then used a few calculators to see where I fall on my investments. For me, I need to invest more heavily and pay off debt to get where I want to be.
Your plan may look completely different and you may change it a few times, and that’s ok! You get to change your goals as you get further in the process and learn more about your finances. Just make sure to start your goals and do the work to put you in the best position possible for your goals.
My Recommendations
There are some basics of investing, debt pay off and living in this chaotic time. The job market is rough out there, jobs are harder to come by, AI is taking on some very specific roles and inflation has made everything more expensive. So here are 3 tips I would start with if you can manage it (if not that’s ok, just start working towards at least one of them):
- I recommend that you have an emergency fund of at least 3 months of your essential expenses and half of your optional expenses. (if you don’t have this now, set a goal to slowly or quickly build this – your choice)
- I highly suggest you invest at least what your company will match in your 401k. That should be your bare minimum, or you are giving away free money. You would be upset to lose $1000 due to theft, yet you are giving away amounts this size or more when you don’t get your employer match.
- If you have high interest debt and no emergency fund, work towards both goals. Build your emergency fund (the speed is up to you based on your job safety, income vs. expenses, etc.) and pay down your debt. Sometimes it sounds better to invest and see your account grow than to throw your money at your debt because you don’t get the instant gratification of seeing your money grow. Don’t be fooled, if your investment return is 10% (which would be an amazing consistent rate) and your debt rate is 20%. You will lose money investing because you will pay more in interest on your debt, essentially losing out on 10%.
Your Goals and Motivators
Ok now on to your goals. You’ve listed your income, debts, expenses and investments and you’ve created a list of what is important to you in your financial goals. Let’s get started.
Now that you know what is motivating your life the most, and have a few of Karla’s opinions on basic budgeting, we’re going to build you budget around your motivator. You can always make changes or adjustments later, but right now we’re going to start with your current motivator. Take your goal sheet and your budget and see how your essential, optimal and investments amounts match your goals.
Budgets are hard and horrible
Before we continue, you may hate budgets or have no experience with them. I get it, budgets are not for everyone. I don’t even want to tell you this is how you should do it, because everyone is different. So at a minimum, figure out what you have to spend on expenses, how much you want to spend on debts and how much you want to invest/save. Then allow yourself to spend the rest. Basically, pay yourself last. If you don’t want to budget what you spend on yourself, that’s fine. But plan what you will spend on the above categories: expenses, debt, investing/savings.
If you want to use our budget template download, the amounts will auto calculate on the 4th section down on the right side of the sheet. You can also play with the tax amount section to estimate what salary you would need increase your income to meet these goals. Additionally, you can set your yearly savings, investments and debt pay off on the bottom of the budget template and the amounts you would need to save to have a 3 month to 3-year emergency fund.
My Motivator
For me, my current motivator is early retirement, with a touch of pay off debt. Based on this, I need to increase my income, lower my expenses, pay off debt and increase my investments. Whew! that sounds like a lot. So I’m going to take only two steps now: invest 50% of my income, while paying off my debt (school loan) as fast as possible. Once my school loan is paid off, I will move this money directly into my investment account with no change to my cost of living, resulting in a 60% investment rate!
Does this mean I’m living on rice and beans? No, but it does require me to watch my spending, not go out to eat as much, negotiate my insurance, internet and cut some expenses that I just don’t see the value in vs. the cost.
I do also have a home loan but am fortunate to have an interest rate of 2.5% so I am not in a hurry to pay this off until I retire as my investment return of even my lowest investment account is at least double this rate. This is a personal decision; some people want the feeling of being debt free and others want to invest as much as they can at a higher return rate vs. their loan pay off rate. Whatever you decide, do your research, and make sure you have a plan and stick to it.
Still overwhelmed or confused? Or just hate budgets? Reach out to me for help, look at our downloadable excel sheets or read more finance articles on our blog.