The Definitive Financial Checklist to Build Wealth
When getting your finances in order, is there ever a finish line? Well, yes and no. There’s no point in getting out of debt just to fall back into the credit card trap, and budgets always need adjusting. But you will get to a “coasting” point, when you’ve hit all your financial targets and you just need to maintain your habits. At that point, you can definitely break out the champagne.
So what should be on your financial to-do list? Here’s 10 financial goals everyone should work towards.
Build an Emergency Fund
If you don’t have an emergency fund that would cover at least three months of your living expenses (and ideally closer to six months or more), building one is, uh, an emergency.
Let’s face it—stuff can happen. You could lose your job, get sick or injured or have any number of calamities happen. Having an emergency fund can take the financial stress out of extremely stressful situations.
Your emergency fund should be cash. It should be something you can access right now, or from the hospital or courthouse. Emergency funds are not home equity credit lines, they are not stocks and bonds. They are in savings accounts. However, extra bonus points for putting your emergency fund in a high-interest savings account, so at least you’re earning a little.
Debt is a psychological and financial drain. If you’re in debt, getting out should be one of your number one financial priorities—after building that emergency fund.
Generally speaking, your top priority when it comes to paying off debt should be to pay off the highest-interest loans first. For most people, that’s credit card debt.
Paying off debt is, first of all, like a guaranteed return on your investment. It also allows you to start getting interest to work for you, not against you. Being debt-free also increases your financial flexibility to change careers, take a year off work to travel or generally make decisions that would decrease your income. If you don’t have debt to pay down, you have more options.
Protect Your Family
Most people don’t like to think about their own death—but making plans for protecting your loved ones (and especially any dependents) in case you die is an important part of getting your finances together. Having a will ensures that your assets will go to the people you want them to go to, not to the default heirs determined by your state. Without life insurance, your death might spell financial ruin for your family.
With the Tomorrow App, getting a will (for free) and life insurance is easy, so there’s no reason to put this step off any longer.
Write—and Follow—a Budget
If you don’t have a budget, now is the time to think about creating one. Budgets are a way to think about your values and priorities, and to make sure you’re allocating your resources (ie $$$) in a way that is consistent with those values. Budgeting apps work for some, while good-old-fashioned Excel spreadsheets can be more customizable.
Track Your Spending
Not sure where to start with your budget? Try tracking your spending. This is a good habit to get into—most people are not entirely aware of how their money bleeds out of their bank account. Tracking spending can be eye-opening when you first start, but is most valuable if you can continue tracking over the long haul.
Keeping tabs on your spending goes along with creating a budget. It’s pretty easy to see if your overall expenditures and savings line up with what you expected, but tracking your spending will tell you if you’re actually spending your money in alignment with the values you established in your budget. It’s also key to identifying areas where you can cut spending, which is crucial if you’re trying to increase your savings rate.
Live Below Your Means
Want to save for retirement, increase your net worth, buy a new home? The key to saving money, no matter what your savings goal, is to learn to spend less money than you earn. If you’re not living below your means already, use the information you gathered from tracking your spending to find opportunities to reduce your expenses—and create a budget that assumes you’ll be living on less than you earn. Living below your means will allow you to save, invest and, eventually, retire.
So what should you be doing with the extra cash you’ve got, now that you’re living below your means? Invest it. Building an investment portfolio is key to building a nest egg that will ultimately lead to financial independence and allow you to retire at some point down the road.
How you choose to invest your money depends to a large extent on how long-term your investment goals are and what your tolerance for risk is. The key to successful investing, generally speaking, is to develop a strategy that takes your individual circumstances into account and then stick with that strategy no matter what.
Diversify Your Income
Whether it’s finding a side hustle or building a robust investment portfolio, having multiple income streams is key to financial stability. If you have only one income stream (your salary, for example), losing that one stream is devastating. If you have five income streams, losing one hurts, but not nearly as much.
Everyone’s strategy for creating new income streams is different. Some drive for Uber, some freelance, others start monetizing their hobbies or invest in real estate. Find something that works for you.
Build an Investment Portfolio Worth 25x Your Annual Expenses
Most financial planners have their eye on one goal: retirement. No matter your age, if you have an investment portfolio worth 25 times your annual expenses, you could safely live on that money indefinitely, assuming a 4% withdrawal rate and a 4% gain on your portfolio. That’s the moment when you become financially independent, and can retire, try a new career, take a sabbatical or do just about anything you’d like with your time without worrying about how to pay the bills.
Give to Charity
If you’re accomplished everything on this list, you can pretty much check off the “get finances in order” box on your to-do list. But someone who’s reached this level of financial stability should also prioritize giving back to those who are less fortunate. How much you give to charity—and which charities you prioritize—is a personal choice, but giving back to your community should be a part of your financial plan.
Accomplishing everything on this list isn’t something most of us can do in a month, year or even decade. But if you keep working towards paying down debt, building an investment portfolio and keeping expenses down, you’ll get there eventually. And if you’re not sure how to start, think about some quick wins you could accomplish this month to build your momentum and motivation.