Monday, February 22, 2010

General Steps to Financial Stability

Before I start posting specific spending scenarios, I wanted to post a general idea of how you could cover your basic financial bases.  Please disregard if you are beyond this of course.  These are the steps we use:

1. Create a budget after monitoring your spending and income for a month.  This will need to be updated with forgotten items as you go.

2. Pay all necessary bills.

3. Set up an emergency fund for at least 3 months (see below for the rest).

4. Maximum matching to your 401k.

5. Max out at least one Roth IRA.

6. Add small "fun" money allowances into the budget.  This is important to keep yourselves on track.  Without a little "fun" money breathing room, you'll catch yourselves splurging more often...this could slow down your progress quite a bit.

7. Overpay your mortgage to at least the nearest $100. We overpay to the $100 after that for a total of an extra $160 a month. Continual extra principal payments will save you thousands in interest.

8. Hit your specific goals - In our case, we put money aside for my husband’s graduate classes, extra into our emergency fund since we want it to be large enough to cover at least 9 months, a set amount aside for stocks, and we put a small amount into our vacation account for annual trips and large "fun" purchases.

9. Open another Roth IRA...we'll be doing this with the unneeded graduate school money this year.

10. Pay down your mortgage or save for future investments.

Even if you can't hit all these steps at one time, simply make it as far as you'll be surprised how fast you'll start building actual wealth. 

We are currently on Step 8 although we are on track to hit all ten steps this year.  I will keep you updated as we go.  :-)

Do you see anything missing above?  What kind of system do you use?


  1. Love this post...great, simple list in order of importance. Of course, a lot of people tend to see 'budget' (most important) and quit before even getting started.

    I can tell you that that is a BIG MISTAKE. Ever since I started using YNAB (you need a budget; no affiliation or interest involved here, just love the software), I can easily anticipate which months will give us a little extra funds and which months are going to need extra funds (i.e. my husband's 40th birthday is in August, time to start planning!).

    I really think everyone can find budgets useful. It's fun when you free up so much extra cash from the categories in which you had been regularly overspending ... and a lot less fear caused by underfunding!

  2. Holly, thanks! I completely agree (obviously)...budgets are the key since you need to know where your money is going in order to redirect it to your bank account. :-)