Complete these steps in order:
- Stabilize and increase income*
- Give 10% to your local church
- Create emergency fund of $1000 in a separate savings account
- Get enough life insurance, 5-10x income when you have children
- Retirement Plan A funded: match any 401k matching contributions.
- Get out of consumer and credit card debt (except school and home mortgage), pay off highest rates first
- If 401k with match is still less than 10% of income save the balance of 10% of income monthly in Roth IRA invested in a Retirement Target Date mutual fund like these.
- Increase emergency fund to 3-6 months’ expenses; if job or income is shaky, have six months’ expenses in an emergency fund. Add more to plan for when you need to trade your car or are expecting a large medical expense.
- Pay off all school debt
- Consider buying a home, save for down payment (normally 20% of purchase price)
- Children’s education: start saving at birth and prepare half of projected costs, put in tax sheltered 529 plan (saving $25/month is nearly painless and should grow to $13,000 for college)
- Increase mortgage payment to pay off home mortgage by retirement age
- Give 11%
- Double emergency fund (above): in a balanced (stocks and bonds) mutual fund
- Retirement Plan B funded: Buy and manage local real estate, single family 3bed/2bath or 2-3 bed duplex, use rent income to pay down mortgages by retirement age. Get secondary market 30 year fixed mortgages (can get up to four).
- Grandchildren’s education ($4k at birth, $8k at age 10, $15k at age 20), can start saving for your grandchildren before your children are even married.
- Give 12%
- Additional Emergency Fund: 6 mo. rental property reserves in a fund like Permanent Portfolio
- Maximize Roth IRA contributions
- Then give away much more and invest in family.
Budgets: I think you should have a spending plan or budget, but often budgets are used primarily to reign in a family member who doesn’t have control over his spending habits. Normally focusing on your next financial goal and having discipline to avoid spending money you don’t have on stuff you don’t need is more important than establishing and tracking a tight budget. If you need that tool, use it. If not just focus on getting to the next step.
*Stabilize and increase income:
Arrive to work early, complete projects early and under budget, meet and beat expectations, become invaluable to your supervisor, make him look good, respond immediately to his requests, keep your word, don’t create problems, participate fully in meetings (offer foundational analysis, problem solving, insight, and vision, no complaining), develop relationships with key people. Focus and become known as an expert in your field, start a blog with book reviews to maintain discipline of reading in your field. Invest lavishly in improving and expanding your skills. Consider starting a side business.