Approaching Your Finance with Purpose

• Establishing healthy financial habits
• Finding the balance between paying down debt
• Finding the balance between paying down debt, saving for an emergency, and getting a jump start on savings goals such as retirement

• Have a backup plan in place to provide for your family in the event that the unexpected happens
• Ensure that you’re doing a great job prioritizing between the many competing goals to make sure that you get the best use of your next dollar

• Prioritize your own financial future above all else
• Make sure that you’re starting to dial in what life is going to look like when you retire

• Define a plan that accounts for unexpected events and health care costs in retirement

Common top goals

• Having an emergency fund.

  • Generally, you’ll want to have to have at least three to six months worth of living expenses set aside in an emergency savings account. (If you’re self-employed or your income fluctuates, you might aim for six to 12 month’s worth of expenses.)
  • This can be used to cover those unexpected expenses that invariably pop up, or float you through a loss of income, without wrecking your plan.

• Growing your retirement accounts.

  If your employer offers a matching contribution, consider contributing at least 100% of what they’ll match. Combine that with the magic of , and you could see your balance grow at a nice pace.

• Eliminating high-interest debt.

Other goals

• Establishing (and maintaining) good credit.

• Paying off your student loans.

• Living within your means.

  Ideally, you don’t want to put anything on your credit card that you can’t pay off in full at the end of the month (or relatively soon thereafter), since this is an expensive form of debt.

• Saving for your kids’ education.

• Growing your investment portfolio.

• Gather up all your paper and electronic bank statements, billing accounts, and portfolio documents. This might include:

  • Income: Salary, investment income, alimony

  • Expenses: Bank statements reflecting withdrawals or other debits, monthly billing statements, and other sources of everyday spending

  • Assets: Savings accounts, home equity, or physical items you own (car, collectibles, etc.)

  • Liabilities: Credit card debt, student loans, mortgage(s), and any other sources of debt

• Next, you can use these documents to calculate your .

  • Simply list all of your assets (such as bank and investment accounts, real estate, valuable personal property) and then all your debts (like credit cards, mortgages, student loans). Your assets minus your liabilities equals your net worth.
  • If you find that your liabilities exceed your assets, don’t panic. This is a common scenario when you’re just starting out. With a financial plan in place, your net worth should grow over time.

It’s a good idea to get a sense of your monthly cash flow — what’s coming in and what’s going out.

• You can use your bank statements from the last three or so months to come up with an average cash inflow and outflow.
  • If you find that your monthly outflow equals your monthly inflow (i.e., you’re not saving anything) or your outflow actually exceeds your inflow (meaning you’re living beyond your means), you’ll want to drill further down into the outflow column.
• Start by making a list of all your spending categories and the average you spend on each per month. Then divide the list into two main categories
  • essential spending (e.g., rent/mortgage, utilities, groceries, insurance, debt payments) and
  • non-essential spending (such as entertainment, shopping, travel, clothing).

One simple approach is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

• Needs (50%)

  • Rent or mortgage payments
  • Utilities (electricity, water, gas, internet)
  • Groceries
  • Transportation (gas, public transit, car payments)
  • Insurance (health, auto, home)
  • Minimum debt payments

• Wants (30%)

  • Dining out and entertainment
  • Shopping (clothes, gadgets, hobbies)
  • Travel and vacations
  • Subscriptions (Netflix, Spotify, gym memberships)

• Savings and debt repayment beyond the minimum (20%)

  • Savings (emergency fund, retirement accounts)
  • Investments (stocks, real estate, mutual funds)
  • Extra debt payments (beyond the minimum)

Getting out from under high-interest debt (such as credit card balances, payday loans, or rent-to-own payments) is an important part of any financial plan.

• • List your debts from the highest interest rate to the lowest.
  • Throw all of your extra cash to the highest interest debt while continuing to make the minimum monthly payment on the others.
  • Once you’ve paid off the highest interest debt, you move on to the next-highest interest debt, and so on.
• • List your debts from smallest to largest based on balance size.
  • put all your extra cash toward the debt with the smallest balance, while making the minimum monthly payment on the others.
  • When that is paid off, you move on the next-smallest debt, and so on. This approach can help you stay motivated by achieving early wins.
• : transferring your credit card debt to a balance transfer card or personal loan with a lower interest rate — allowing you to focus on just one monthly payment.

• Make sure that you have a solid understanding of your current financial situation
  • Own: Include all of your assets, such as checking your savings accounts, investment accounts, retirement plans, a home, etc.
  • Owe: Include all of your liabilities such as student loans, credit cards, personal loans, mortgages, etc.
  • Spend: Include all of your inflows and outflows that occur on a regular basis

As you work through your goals, prioritize them so that way you’re prepared to make trade-offs down the road.

• Involved in each aspect of investing, embracing a hands-on approach
• Buys stocks or other investments, and likely does research to decide which types of investments to make.

An active investor can have a professionally managed portfolio or they could choose to manage their own portfolio, if they believe they have the skills and expertise to do so. But there are risks involved, which include potentially losing money, so you’ll need to figure out .

• Passive investor: Investing but don’t want to be significantly involved in making investment decisions
  • “Buy-and-hold” philosophy where you buy securities and plan to hold on to them for a longer period of time, throughout fluctuations of the market.

If you’re open to more activity on your investment account, but you don’t want to spend much personal time studying the market, , and otherwise handling all the details, then you may want to consider automated investing.

• Use computer algorithms to generate tailored investment advice and financial planning. It may reduce the learning curve for some beginner investors, helping them start building and managing a portfolio to achieve their financial goals.
• Use computer algorithms to select and trade stocks, , or other assets.

How automated investing works?

• An interested investor takes an online survey about their financial situation, risk tolerance, and goals.
• The automated investing platform then uses this data to recommend investments to the client.
• Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor.

• Rich people are greedy
• Money should be avoided
• There’s virtue in having less money
• Don’t like to review your bank statements
• May even suffer from financial anxiety

• Believe that the key to happiness and the solution to your problems is more money
• Believe that you can never have enough money
• Associated with lower-income, lower net worth, and sometimes, destructive financial behaviors

• Your self-worth and net worth are likely closely connected
• May struggle with desire to keep up with the Joneses
• Buy flashy new things
• Inclined to tell people you make more money than you actually do
• Associated with poor financial behaviors, and people from poor backgrounds are even more vulnerable to this script

• Recognize the importance of saving for your future
• Downplay how much money you have or how much money you make
• Associated with being secretive and frugal, which can be detrimental to your relationships and inhibit your ability to enjoy your current resources.