So often I hear that the biggest problem with finding personal financial success is really knowing very practically what to do and how to do it. Depending on whom you read or whom you listen to. Additionally complicating the conundrum is different people in different situations will require different advice. In an effort to try to KISS (keep it simple, stupid), I wanted to lay out a roadmap to help guide you along your journey. You may be further along or not very far along at all, and you may disagree with some of my steps but at least this will give you a starting point! 

Step 1: Get your house in order and create your own roadmap

The very first step I’d encourage you all to do is to get your financial house in order. If you don’t know where you’re currently at, it’s tough to assess where you’d like to go and how you’d get there. Take stock of where you stand with: bank accounts, investment accounts, debts, insurance and anything else you can think of. Assess your current salary or pay and what benefits are offered to you through your employer. 

Once you have a good understanding of where you’re at, you’ll also want to have a good budget (if you don’t already). A budget is simply a tool to track your income vs. your expenditures and to help track your progress towards your financial goals. In it you track your income (which might be consistent or might not be), track our fixed expenditures (rent/mortgage, debt payments, phone bill, other utilities) and our variable (i.e. groceries, shopping, fun). You can also track your progress towards goals, i.e. saving, investing or extra debt payments. 

It’s only after first having a good understanding of where you stand that you’ll then be able to make any progress!  

Step 2: Get an emergency fund

I’ve said it before and I’ll say it again – if 2020 hasn’t taught you the importance of having an emergency fund, I don’t know what will! I’m pretty sure everybody; whether you were gainfully employed throughout the year or furloughed/laid off, everybody probably had the scary realization that their financial wellbeing could be at risk. I know I certainly gave it some thought in April around the peak uncertainty – what would happen if Mrs. Money, myself, or both of us got laid off? I was very thankful knowing I had an emergency fund behind us that would provide a few months of safety. 

If you don’t have an emergency fund, let 2020 be your wakeup call. I personally keep my emergency fund in a separate savings account, in a completely separate bank. I do all that to make sure it’s a real emergency before I pull it out. It’s in a savings account not stocks or index funds because I want to be certain that money will be safe! 

If you don’t have one, I recommend starting…like now. As practically as you can, start setting aside $50, $100, $250 or however much you can until you hit a goal of $1,000. Hitting that goal is a big mental victory and will keep you hungry for more. Then keep it up until you hit 3 months of expenses, and then 6 months. Once you’ve reached 6 months of expenses, you can stop and redirect that money elsewhere. 

Of course the question will come up – ‘what are the expenses I should be setting aside for?’ Obviously if you got laid off I don’t think you’d be eating out too often, buying new clothes or going on vacations so try to have enough set aside for the necessities – rent/mortgage, groceries, bills, cell phone, insurance etc. You’ll be so glad you did! 

Step 3: Maximize your current benefits 

Once you’ve got a good grasp on your current situation and have an emergency fund, I now like to recommend as best you can, maximizing your current benefits. If you’re employed, you likely are offered a benefits package through your work. This may be generous and extensive or more bare-bones but it’s important to understand what you have available. Each open enrollment you’ll be given the chance to signup and it’s important to get the coverage and benefits that are important to you!

For example, my employer offers a pretty sweet benefits package, so Mrs. Money and I try to take full advantage of them. It’s actually making more sense for the whole family to be on my health insurance plan compared to keeping Mrs. Money on her plan. We also get competitive life insurance rates which we take advantage of. Although we’re not completely there, we both try to save 15% of our salary for retirement through our 401(k)s at work, but definitely enough to get the free match. Finally, the company I work for is publically traded and we have an Employer Stock Purchase Program (ESPP), which I also take full advantage of. It’s a great way to purchase company stock at a discount!

Every situation will be different but take some time to understand what benefits are already available to you! It could be through work, maybe a professional group you belong to, maybe through your auto insurance company. Do some digging to figure out what’s close by! 

Step 4: Save 

Saving is so critical to growing your wealth and providing financial success in the long run. I always say that your Income = Expenses + Saving/Investing, and it should be a part of your monthly budget. As you’re getting started, this saving will likely all be directed at Step 2 (Emergency Fund) but once you’ve completed that you can keep saving. I save for short to medium term financial goals that I have and in the past (and present), that’s consisted of: Mrs. Money’s grad school, a down payment for a house, a slush fund for house repairs, a car (we like to pay cash), or just a general bucket in case we need it or for larger purchases. 

In terms of where to put that money, I’m a big fan of a high yield savings account (HYSA), which is a newer term for more of the online banks that because they don’t have physical locations, can pay a higher interest rate. I use Capital One and American Express, but have also heard good things about Ally Bank. Do a little online research before choosing the bank that’s right for you, and of course make sure it’s FDIC insured, which means it’s a legit bank and the government won’t let you lose your money if the bank goes under. 

Step 5: Get aggressive with debt 

I put this debt step after the saving step, because I think it’s important to have a little bit of a cushion before getting super aggressive with paying down debt. It is important to talk about which debts make sense to get after first – and that’s typically the higher interest rate loans. I’d start with credit card debt as those interest rates are typically the highest and then get after personal loans. Of course you’ll be paying the minimums (I hope!) but then you can start paying an extra $100, $250, $500, $1,000 or whatever extra you can afford to get out of debt faster. 

You might be asking why get aggressive with debt in the first place? Debt is a powerful tool that can be used for good or bad, but too often debt, especially those with high interest rates, gets away from us! Interest rates can add up and before you know it your debt is way more than you initially had! That interest you’re paying towards debt instead could be working for you via a savings account or investments, instead of working against you! 

Early on in our marriage Mrs. Money and I worked aggressively to get out of student loan debt, which was about a 6%-8% interest rate. We paid an additional $1,000 per month until we were out of debt. With our house, early on we were pretty aggressive, paying an extra $1,000 (we were in the habit after the student loans!) towards the loan but we slacked off in the past few years mostly because with interest rates on houses so low (around 3ish%), it almost made sense to put that extra money in the stock market where on average I was earning a 6ish% return. 

Debt is fueled by interest rates, which can be a powerful tool to be used for or against you. Of course there’s times we’ll all likely need debt to advance our lives but keep a mentality of it being a temporary means to an end! 

Step 6: Invest

Leading right off the interest rate discussion, once you’ve got your debt more under control, now it’s time to put interest rates to work for you! The mot common way that young professionals (and really anybody) does this is via the stock market. It’s easy for anyone to get in or out of, it can be low cost, and over time has provided a healthy return. 

To do this you’ll open a brokerage account (Vanguard, Fidelity, Charles Scwab, Robinhood are some of the big ones) and then move some money in. From there you’ll start buying stocks or mutual funds and hopefully start watching it grow over time! The real power is the over time piece as you likely won’t get rich overnight but on average 6% over time will grow faster and faster as you reinvest your earnings. 

I personally put about 95% of my investment money into index funds, which is a fund that owns basket of stocks of basically all the stocks that trade on the stock market. There are low fees associated with index funds and although it’s a pretty boring investment (not going up or down very drastically), it does well over time! 

Step 7: Protect

As you start progressing up the young professional success ladder, it’s important to pause and make sure you’ve got a good cushion underneath you. Bad things will happen to all people and unfortunately it’s not a matter of if but when. Whether it’s a job loss, the loss of a spouse, the loss of a home or something else (all of which have happened to readers of the blog), it’s important to be able to get back up after you’ve been knocked down.

The first thing to do, which you’ve already accomplished is having an emergency fund. Having 3-6 months of expenses is a super practical way to get back up after you’ve had a setback. Other things to consider are insurance – both health and life insurance. Mrs. Money and I have health plans that cover the basics but also have a safety net if we get really sick or hurt. We also have life insurance, and have progressively gotten more coverage the more complex our lives get (i.e. having BabyMoneyFinance). While I don’t think it’s wise to go overboard with a safety net, it is important to have coverage that you’re comfortable with and that would be enough to ensure your loved ones won’t be too burdened if you passed away or got really hurt. 

Step 8: More advanced thinking 

The final step of this practical guide is really just going back and revisiting steps 4-7. I don’t really think there’s an end point to financial success aside from maybe retirement, which is likely a long ways off for many of us. The older and wiser you get, the more complex your situation will be which will require additional saving, additional investing, more diversification, more debt management and of course more protection! Whether you work with a financial advisor at this stage (who will have a wealth of knowledge) or just other peers in your similar situation, I think it’s good to share ideas and tips to continue developing and growing! 

Personal finance can be a tricky idea to think through but with a good plan and a good roadmap to get to your destination, it’s totally feasible! Start small, develop good habits and celebrate your successes both big and small! Stay motivated and remember that financial success is a marathon, not a sprint!

PS Hungry for more? I’ve written an in-depth guide entitled “The Personal Finance Checklist” to help. It starts at $0.99 but has add-on options for email or a virtual session support.