Rose and Will felt like they were juggling a million things at one time. They had so many wants and needs, but not enough money to fill them all at the same time. They were a young couple in their mid 30's in the middle of building their individual careers while welcoming their first child. Like any couple, they had goals, priorities, and concerns.
Here are some of the concerns they shared with me.
Concern #1: Childcare cost, including future education costs
Concern #2: Enough space to live in with their growing family
Concern #3: Aging parents
Concern #4: Paying off Debt
Concern #5: Were they saving enough for retirement?
There are many families in the same position as Rose and Will, who have the same circumstances, and while you go through the juggling act of many goals, you need to have a full financial plan.
Goals are great; they create a vision and a place to start, but having a full financial plan puts action to these goals to help you turn dreams into reality. Without a plan, it would be hard to focus on goals that were obtainable today while still being on track for long term goals in the future. So how do you plan for the future while living in the present?
Below are the first three steps Rose and Will did to create a full financial plan.
Getting rid of Consumer Debt
Cash flow is a critical component for any family, especially when the topic of childcare comes up. We focused on eliminating consumer debt so we could use those monthly payments towards childcare instead. When it came to their debt, we focused on two components:
1) Lowering the interest rate on credit card debt
Their credit cards had interest rates over 18.99%, which meant a majority of their monthly payment was going towards interest instead of principal. If we were going to accelerate the debt pay off, we needed most of their payments to be going towards the principal.
2) Implementing a money management system
Rose and Will were already trying to pay down consumer debt before we even met. They would try to make additional payments on each of their cards. But even with these efforts, they have to use the credit card because they were short on funds. It felt like they were churning their wheels. They needed a sound money management system, which allowed them to pay all their bills on time, spend freely, save, and pay down debt consistently.
The Ultimate Guide to creating a predictable and scalable Money Management system.
Build up an Emergency Fund
Have you ever heard the saying, "you don't know what you don't know, but you know that you don't know something?" Rose and Will acknowledged the potential for some emergency to come up that would require a lump sum of money, but they didn't know when or how, which is why we need to prepare for the eight most common emergencies.
While we were primarily focused on paying down debt, we also needed to set a little money going into an emergency fund. The key to building an emergency fund is to make it out of sight, out of mind, and automatic. We implemented a small direct deposit from each paycheck per pay period to go directly into a savings account.
Max Out TWO Roth IRA's
Rose and Will were worried about retirement. They witnessed their parent's lack of savings for retirement income and didn't want to be in the same boat working till they were in their 70's so they could get the highest social security payment. But we had other goals and priorities to focus on. As a compromise, we decided it would be wise to max out at least one ROTH IRA account, and as they achieved some of their short-term goals like a fully-funded emergency fund and paying off debt, we would try to max out two Roth IRA's.
They knew this wouldn't be adequate for savings to provide for financial freedom in the future, but as I told them, it was a baby step. Plus, up to $10,000 in a ROTH IRA could be used towards a future principal residence purchase, or it could be used for qualified post-secondary education, so in their eyes, it was a win-win.
Imagine a full financial plan is a book, and each page represents some short term goals being planned out and executed. This was the first of many steps for Rose and Will, but it was manageable with their hectic lives, and the best part we automated everything. The important part is they got started, and they had a plan. To learn more about what a full financial plan really includes, click below for more details.