10 Cornerstones of Solid Financial Health

Today I am taking a step back to look at the basics. I have written a lot of specific posts lately and decided that I need to get all of my core ideas and practices into once place. These are the things that you need in order to create and maintain a stable financial life:

  • Emergency fund - This is the first step and arguably the most important. Without some money set aside for mishaps you can get behind easily. At the very minimum we should all have $1000 set aside. I choose to have at least 3 months of living expenses.
  • Frugality - Cutting expenses and being smart with your money is the logical next step. Do you really need a home phone and cell phone? What about 1000 channel HD cable or basic? Use coupons and do sale shopping. Eat out less. The internet helps a lot here!
  • Self Control - Pay yourself first. Resist impulse buys and make yourself wait before buying something. Use online bill pay and check your accounts at least weekly. Budget your "fun money" and stick to it. Get a "money partner" to hold each other responsible for sticking to the plan.
  • Patience - None of us will get rich overnight. Save your money and stay on top of expenses. Over time we will get there!
  • Goals - Set goals for yourself and work hard at them. Pay off your debts, start investing in your 401(k) and/or IRA. Start savings accounts for a new car, house, boat, vacation, etc. Without goals we cannot stick to our plans!
  • Discipline - Once you set your goals you have to create a plan to reach them and stick to it. Make sure your put that $100 per month into your house down payment account every month. Automation and direct deposits help you a lot here. If you feel yourself slipping take a step back and re-evaluate. Why are you slipping?
  • Investment Plan - For longer term goals and retirement you need an investment plan. Figure out the best mix of stocks/bonds/cash and adjust your investments accordingly. This is a good time to visit a fee-only adviser if you are unsure of how to approach it. The returns on the right portfolio for you far outweigh the costs of their service.
  • Analyze - Take time each month to do a quick analysis of your finances. Are you paying any unnecessary bank fees? Is your broker charging high commission? Are your interest rates on savings in line with the competition? Are you happy with your financial situation and it's progress?
  • Annual Review - This is a long but necessary step. Each year you need to do a complete evaluation of all aspects of your finances and re-balance your investment portfolio. Are you paying the correct amount of tax? Are your investments too volatile for you to stomach or do the returns seems too low? This is where you make your plan for the following year to work towards!
  • Entertainment/Wants - Lastly, but most importantly, be sure to include wants and "fun stuff" in your budget. No one can stick to a budget that doesn't allow us to do things we enjoy. A good starting point is 50% Needs, 30% savings, 20% wants. If you are in debt I would lower to 5% wants. Fun stuff keeps us motivated and on track!
If you have the above 10 items covered you are on the right course to financial freedom. Keeping on top of things and checking up on a regular basis will keep the machine going. All it takes is time!