To accomplish any task, goals are needed to develop guidelines and benchmarks to reach toward in order to come close to and then achieve the goals. When discussing goals to work for to establish your financial independence, they must first be predicated on one of the most important financial habits available: Pay Yourself First. The Pay Yourself First Concept is nothing new. It is just that so few people seem to be able to follow it, due to the early mistakes of youth.
Entering into major purchases blindly is a daunting hindrance. Without any regard for the future consequences of the decision. young people buy indiscriminately, especially when it comes to vehicles. The only real way to get into this habit then, is to make it your first decision, your first practically acted upon behavior in your financial life. Take your first paycheck, even if it’s only $212.67, and write yourself a check payable to (Your Name) for $21.27. And while you’re thinking of it, yes, always round up when paying yourself. After all, your first responsibility is to Yourself.
Check your last tax return, the one that shows an exemption of $3,500 for the tax year 2008. Since the IRS is exempting part of your income from taxation, shouldn’t you begin to use that money for yourself? Obviously, you should. Once you have this concept down, and working practically for your situation, there are basically three funds which you need to fill up. They are your emergency fund, your short-term goals fund, and of course, your retirement fund. The fact that you have three major funds available does not mean you must save 30% of your income (although that could be made possible), you should at least be placing some money in each fund, until the fund is fully invested and you have no more wishes for its growth.
But in the case of the retirement fund, this date is a long way off. Retirement funds really need to grow, permanently if possible. So let’s assume now that you will place certain monies in each account on a monthly basis. If you are making $4,200 per month, your savings will be $420 per month. You need to decide what percentage of this money will enter into each fund. Suppose you decide on: Emergency-50%, ST goals-30%, and the Retirement getting the rest of 20%. So each fund would receive:
Emergency – 50% = $210
Light Fund – 30% = $126
Retirement Fund – 20% = $84
Total saved $420
After 24 months of this, your total of deposits made should be:
Emergency-$5,040
Light-$3024
Retirement-$2016
In 24 months, you’ve saved a total of $10,080 in your various locations. Hopefully, this money is also earning or gaining in the markets. The retirement fund should be worth $2,265.67 by then (at a return rate of 12%). Your Light fund could be worth $3267.58 (return rate of 8%), and the emergency fund $5345.91 (at a return rate of 6.1%). When your emergency fund has built up to $10,000, readjust your percentage allocations to favor your most important goal; supposing this goal to be the Light fund, increase it to 50%, make the emergency fund take in 20%, and allocate 30% to the retirement fund. Review these percentages once every six months, and then redirect your income accordingly.
Finally, avoid the three biggest killers of financial independence: New cars, high fee and high interest credit cards, and exotic or spendthrift locations for that dream vacation.
A new car that costs $20,000 can depreciate 10-15% immediately upon leaving the sales lot. Imagine a truth-in-advertising ploy in which you would be told, “Caution: you may put 15% down on your automobile purchase today, but if you wish to own some equity position in the vehicle, you should increase the down payment above this amount.” Do they ever say this at the car dealers? The old saying about car dealers and the truth staying as far apart as the east and the west rings true in this case. For this tip, suffice it to say, let someone else pay that depreciation, and buy the used cars.
Vacations present several opportunities, even on a daily basis, to overspend on things you will likely never need. Tours and souvenirs are examples of the obviously contrived tourist traps you would like to avoid. Others are more subtle. Your vacation is for your relaxation. It is not a competition to see how much money you can spend in one week. So take what you need, come back with enough to make it home within the context of a possible final vehicle breakdown, just in case, and just enjoy yourself. And when you get back, replenish that fund and pay yourself first with the first 10% of your next earnings check again.