Do This First. And Then This.

The internet has brought us many, many things. Including much more financial “advice” than anyone could possibly use.

Invest everything in retirement accounts. (Roth is always best…except when it isn’t.) No, wait, pay off your credit cards instead. Or get a lot of credit cards for point rewards. Real estate investment is golden! Gold is golden!

How do you even begin to make sense of it all?

As a coach and planner, you will be completely unsurprised when I say that it starts with your goals. And while I appreciate that you are a completely unique snowflake with your own dreams and aspirations, nevertheless I am going to hypothesize that you do have a few things in common with everyone else on the planet:

• You would prefer to be out of debt.

• One day in the future, you would like to not have to work for pay.

• Sometimes you like to spend money on things that you want, not just things that you need.

There are (or should be) seven items on everyone’s financial To-Do list. Accomplish them in this order:

1. Create a basic cash cushion. Many call this an emergency fund, but I take a slightly different take. A cash cushion has two components: a buffer against the possibility of losing income, and a reserve for known(ish) large expenses in the near future. This is how you calculate that number, creating both an emergency fund and a sinking fund.

2. Once you have established a “basic” cash cushion (I’ll explain what I mean by “basic” later), contribute to your workplace retirement plan up to the company match. If you do not have a workplace retirement plan, or your company does not match contributions, set your contribution at 10% of your gross pay. If that bites too much, start at 5% and commit to up it by one percentage point every six months. To be clear, 10% may not be enough. We’ll circle back to this…

3. Now we get to talk about debt. Put in place a plan to pay off high interest (e.g., double-digit interest rate) debt. (Here are some thoughts on making that plan.)

Remember, this stage is all about creating the plan and implementing it; you likely won’t be debt free before you move on to Step 4 if you have five figures of debt. And while I hate to put arbitrary rules on this, I would say that a plan that does not have you out of high interest debt in three years may not be a particularly good plan at all.

4. Plan to fully fund your cash cushion. Remember I talked about a “basic” cash cushion in Step One? This is what I meant:

When you calculated what your cash cushion should be, it was likely a BIG number. We need to break it down. You may feel that you need a year of living expenses in your emergency fund to really feel secure. But for your basic emergency fund, maybe just set the goal at three or four months. Or it may be that the “sinking fund” component of your cash cushion included not just a replacement for your dying car, but an overseas vacation as well. Your basic cash cushion will have stripped out the “nice to have” voyage.

But now that we are at Step 4 — your debt payoff plan in place (the debt is not necessarily eliminated at this point, but you are well on track), your retirement savings plan humming — we can circle back to that difference between the “basic” cash cushion and what a fully funded cash cushion could be. There is still some very important nuance here, though; that sinking fund is not a wish list, okay? We have other goals to accomplish, and we don’t want to get stuck on this step.

5. Increase your retirement account contributions up to your goal. I am here to tell you that if you are contributing only up to your company match, there is a pretty good chance that this is not enough to give you the retirement that you want, when you want it. This is especially true of high income earners. And if you are contributing just 10% without a match, that may still fall short unless you are young with many decades to save ahead of you. As a first step, get out a good, basic retirement calculator (like this one from Vanguard) and see where you stand.

6. Any low interest rate non-mortgage debt? If your high interest debt is now paid off, let’s look at what’s left. Student loans that are not likely to be forgiven? Car loan? HELOC? Now is the time to turn your attention to these matters.

7. And finally, everything else! At this point, you are fully funding your retirement future. You have eliminated the most annoying debt in your life and have a smooth plan for any remainder. What’s left? College savings? A new home? Starting a business? That big vacation that didn’t get funded in Step 4? For some, this is actually the hardest step: What do you want?

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