At this point in your financial journey, you’ve already made a budget, taken a financial inventory and calculated your net worth, paid off all of your (damn) non-mortgage debts and saved a sizable emergency fund.
I’d be willing to bet that this puts you in the top 5% of Americans with regards to our financial well-being.
And now, it’s time to start enjoying the fruits of your labors a bit more while also kicking in your retirement investing.
The Fun Part…and Saving Up for Some Big Stuff
Once you’ve cleaned up your money messes and put away cash to weather rainy days, you’re financially ready to start having a bit of fun and saving for short-term needs.
In most cases, families have taken years to get through the first five steps and reach this point of relative stability.
It’s okay to breathe a little and reward yourself (within reason of course). If you’ve delayed a family vacation or a new piece of furniture, now is the time to make those purchases. Remember though, NO MORE DEBT, so these items need to be paid for with cash from your “extra” monthly income that is no longer going toward funding your emergency fund.
Along with some immediate “needs,” this is also the point where you should establish some savings accounts for larger purchases that you know will be coming down the road.
For most of us, this is primarily going to be saving for your next vehicle. No car payments, right? And you know you’ll need one, so don’t treat it like an emergency!
We recently bought a very nice, very slightly used minivan for our family with cash. I have to tell you it was one of those surreal moments when Bethany and I were able to look at each other and say “Yeah, we rock!”
If you don’t think it’s possible to buy a car without a payment, stay tuned for a future post on that topic. In the meantime, I invite you to watch this great video from Dave Ramsey’s team: Drive Free, Retire Rich!
I recommend saving for these large items in separate accounts and doing it with an automatic monthly draft. If you set up an ING account like I recommended in Step 5, they make it super easy to add unlimited sub-accounts for just this purpose. I told you ING was cool!
Make that Money GROW!
“The most powerful force in the universe is compound interest.” – Albert Einstein
This is also the point in the plan where we really ramp up our investing to grow our net worth over the long haul. Unlike Dave Ramsey, I do not recommend that you completely stop investing during steps 1-5 IF you have a 401k that provides “free” matching funds.
Instead, I would advise you to invest what it takes to take full advantage of any employer matching all the way through the process, as long as you have some extra income to still make it through the steps. I wouldn’t do anything over that until you get to Step 6, however, because you need to maintain all your focus on the step at hand.
For most of us, the best place to invest will be in tax-advantaged retirement accounts.
Why? Well, because they are tax-advantaged! Trust me, the ability to contribute pre-tax earnings into a 401k, 403b or Traditional IRA and/or withdraw tax-free earnings from a Roth IRA or Roth 401k will make a HUGE difference in your bottom line.
I am not a financial professional and every individual’s circumstances are different, so I’m not going to be prescribing any specific investing advice.
You will need to either get with a financial planner or do some research through reputable sites like Vanguard or Get Rich Slowly to develop your own plan based on your age, risk tolerance, goals, time frame and other personal factors.
For most of us, investing 10-15% of our income is a very worthy goal that (again depending on your specific situation) should get us to a comfortable nest egg in our retirement years. Given that you probably have a vehicle to save for and perhaps other immediate needs, this may be a challenge.
If you cannot invest the full 15% of your income right now, then invest all that you can this year and systematically increase it a bit each year until you get there.
For example, if you can only save 8% this year, go ahead and do that. Then, as you get raises at work, commit to increasing this by 2% each year until you hit your target amount.
Get started with your investing now, and you’ll learn over time that Mr. Einstein was really onto something!
If you’re wondering where we are going from here, just stay tuned! After retirement investing, we’ll be tackling the plan for establishing college savings for your kids if you’ve got them. Then, we’ll move on to paying off our house…and beyond!
So what Step in the Married Money Management series are you currently on in your own personal financial life?
Here’s a rundown of all the posts available to you in the Marriage Money Management series: