Securing Your Family's Financial Future—Part 3: Creating Your Freedom
What’s the real goal of all your financial decisions?
Some people would say security. Some would say retirement. Others would say simply having more money.
Here’s my take: Personal finance is about creating the freedom to make lifestyle decisions that make you happy, both now and in the future.
It’s about being able to do work because it matters to you, not because you need the paycheck.
It’s about being able to support your children and your spouse in the things they care about.
It’s about having the time and resources to do the things that bring you joy.
It’s nothing grand. Most people don’t need private jets or tropical islands to be happy.
They just want to be able to make the decisions they want to make without constantly worrying about the financial implications. And in this article we’re going to cover the steps you can take to do just that.
If you haven’t already, make sure to check out Part 1 and Part 2 of this series, where we talked about laying the foundational steps of your family’s financial plan:
- Setting and prioritizing your financial goals
- Creating a system for taking control of your money
- Building a secure financial foundation
With those things in place, you’re ready to take the next steps and start creating your financial freedom.
Let’s get to it!
Month 8: Crushing Your Debt
Research shows that debt is linked to higher levels of anxiety and depression. Debt is also in direct opposition to financial freedom because you’re paying interest to others that could otherwise be used to fund your personal goals.
In other words, paying off your debt is crucial to both your mental and financial health.
It’s normal to feel overwhelmed by your debt, but it IS possible to take control. Here’s how:
- Start with why: Back in Part 1 you defined the reasons WHY you’re making all this financial effort. Revisit that now. Those personal goals and values will help you find the strength you need to create and stick to a debt repayment plan.
- Know what you owe: There are four things you should know about every outstanding debt: the current balance, the interest rate, the minimum payment and the due date. You can get this information from your credit report, from The National Student Loan Data System, and from recent statements from your lenders.
- Automate your minimum payments: Ensure these are paid on time every time.
- Consider getting help: If your debt feels overwhelming, consider checking out The National Foundation for Credit Counseling for assistance.
- Build some savings: I always recommend building up $1,000 in savings before putting extra money towards your debt. This makes it less likely that you’ll have to resort to credit cards if an unexpected expense comes up.
- Choose a strategy: There are two popular methods for prioritizing your debts. The debt snowball spurs progress by paying off your smallest balances first. The debt avalanche saves you the most money by paying off the highest interest rates first. Both are good for different reasons, so pick the approach that resonates with you.
- Automate: To the extent you can, automate the extra payments you’re making each month. Make sure these payments happen before the money can be spent on discretionary items.
- Don’t take on more debt: Make sure you’re moving forward, not backward.
- Stick with it: Depending on your current level of debt, paying it off may be a long journey and will almost certainly feel discouraging at times. Find a support system through friends, family, online communities or elsewhere to help you stick to your plan and keep making progress.
Month 9: Investing In Your Future
Investing is a topic that intimidates a lot of people. Many people think they don’t have enough money to invest. Others think it’s too risky, too complicated or that they need an expert to do it for them.
All of those feelings are understandable given the way most media outlets talk about investing. But none of them are true.
Good investing is actually simple, if not always easy to implement. You don’t need a PhD in finance and you certainly don’t need to pay a professional a ton of money to pick stocks.
Here are some simple steps you can take now to put yourself on the right track:
- Set a savings target: This calculator will help you set a monthly savings target. If you can’t save that full amount now, start with what you can and set a calendar reminder to increase your savings rate by 1 percent every 6 months.
- Take the full employer match: If your employer offers a matching contribution to your 401(k), start there. Contribute enough to get the full match.
- Contribute to a Roth IRA: If you have more to save, consider opening a Roth IRA. You can contribute up to $5,500 per year ($6,500 if you’re 50+) and the money will be tax-free when you retire.
- Go back to your employer plan: If you still have more money to save, good for you! Go back to your 401(k) (or other company plan) and contribute up to the max.
- Lean toward index funds: In all your accounts, look for low-cost index funds to invest in. Their track record says they’ll likely outperform your other options.
- Ignore the noise: The hardest part of investing is staying consistent. The stock market will go up and down, sometimes significantly, and there will be a lot of people saying you need to do this or that RIGHT NOW! Your job is to ignore the noise and stay the course.
But What About College?
Saving for college is fantastic if you have room in your budget to do so. But I encourage parents to focus on other goals first, like building an emergency fund and saving for retirement, because there are many routes to a college education and many ways to fund it. But only you can provide for yourself.
Still, if you want to get started, a 529 plan is a great place to start. Money inside a 529 plan grows tax-free and can be withdrawn tax-free for college expenses, which is a big advantage.
Check this list to see if your state offers an income tax deduction for contributions. If so, your state’s plan is likely your best option. If not, here’s a good list of 529 plans to consider.
One Step At A Time
If you’re actually reading this in your eigth or ninth month of pregnancy, you know all too well that nothing worthwhile ever happens quickly (will this damn baby get here already?!).
You can absolutely take control of your financial situation, build the security your family deserves and use your money to create a life you enjoy. But it won’t happen overnight. It’s an ongoing process that requires time, attention and diligence as you put one foot in front of the other.
The early steps are the hardest, both because they’re new and because it still feels like you have forever to go. So don’t put too much pressure on yourself and don’t be too hard on yourself if things aren’t moving as quickly as you’d like. If you follow the steps in this series one at a time, you WILL build a better financial future for you and your family.
Want more? For even more detail on these topics, check out Matt’s 10 week course that walks you step-by-step through every major financial decision you have to make as you start your family. Matt’s expertise comes from his personal experience as a new dad and his professional experience as a fee-only financial planner working with other new parents. The Bump readers get a special 20 percent discount, so take advantage here: 10 Weeks to a Better Financial Future.