The Basics

There are some basics that will help anyone get started financially, or keep going in the right direction. The fundamentals outlined here are accredited to the Alliance of Comprehensive Planners.

Save regularly. It’s a good idea to save at least 10% of your annual gross income. Gross income is your income before any deductions, including taxes, are taken from your pay. Your savings can be into an emergency fund, or into a retirement account, or a combination of both. Even after you retire, you should have about a 10% cushion in what you spend of your income to allow for emergencies and unusual expenses.

Have enough liquidity. You should have emergency savings to pay for unexpected expenses without running up credit cards. A good initial goal is to try to accumulate 10% of your annual earnings in a savings or money market account. Eventually it’s a good idea to have three to six months of your regular expenses in this account. Once you have accumulated a good emergency fund, you can invest in some mutual funds outside your retirement accounts.

Pay off your credit cards and other consumer debts. If, when you start your emergency savings, you need to pay down the credit cards, do that while you’re building up emergency savings. Once the credit cards are paid, then don’t charge more on the cards then you can pay off each month. While car loans and 0% financing can help you acquire assets without paying too much in interest, you shouldn’t let these debts be a major part of your monthly budget. For unusual expenses that are planned, like vacations, save enough in advance rather than incurring debt for them.

Buy a home that’s the right financial size for you. You want a home that meets your needs, but doesn’t burden you financially. For most people, a home that is appropriate for them financially is 1.5 to 2.5 times their gross annual income. A household that makes $100,000 can easily afford $150,000 - $250,000 home. The mortgage on a home, ideally, is no more that 80% of the value of the home. To purchase that $250,000 home, have $50,000 for a down payment. The mortgage on the home has some tax advantages, and does not need to be paid off aggressively like credit cards and other consumer debt.

Maximize your human capital. The biggest asset you have, and the one over which you have the most control, is you. Get training and formal education to have a career that you enjoy, that supports you in a comfortable lifestyle.

If you stay on track with these basic fundamentals, the chances are good that you will progress through your financial life in a healthy manner. People who are behind in the financial life cycle often have one or more of these basic fundamentals that manage poorly.