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  • Writer's pictureConvergent Financial Group

The Money Checklist: Phase 1

The Money Checklist: A Plan You Can Actually Follow

I started training my kids about wealth creation when they were very young. I would often tell them that building wealth is simple but not easy. Creating wealth is simple in that it is uncomplicated. The basic formula doesn’t change: Earn + Save + Invest = Wealth Creation. However, it’s not always easy to carry out each piece of those individual tasks. In fact, it’s not uncommon for people to struggle with even knowing where to start…

People often say, “I’ve started saving. Now what should I do and in what order?” This 3-part blog series is my answer. I believe that your savings should be applied in the following three financial phases. There are some specific circumstances that would cause me to steer you to jump out of order, but for the majority of us, this is the path. So, you can use this wealth building checklist blog series as a basic framework.

Phase 1 - Operational Setup

Laying the foundation

This is the most mundane work of wealth creation, but it is also the most powerful. The operational phase gives us a foundation of confidence and security to then launch into more exciting and rewarding areas of investing.

The first part of step one is to set up your 401K deferral to an amount that will maximize your employer’s contribution match. Any employer match is free money and “free” is one heck of a return on investment. So if your employer kicks in 3% when you contribute 3%, put in the 3% so that you get the full employer 3% available to you. If you don’t have an employer match program, then it will be in your best interest to skip any retirement contributions in this phase.

one hundred dollar bills

Second, I recommend that you create a savings account, which we will call your emergency account. This account should be held by a different institution other than that of where your checking and regular savings accounts are located. The reason is because you don’t want to be tempted to spend out of this account or do a quick and easy transfer to your checking… it should only be used in case of emergency.

I recommend that you have 3 to 6 months of living expenses in this emergency account. Build it up and then forget about it. Living in the times of COVID-19, we are reminded how important this simple step becomes. (You can read more about my stance on why "cash is king!" here.)

Keep in mind that living expenses are just the amount of money you spend after taxes, deductions, and savings. It's the amount of money it takes to pay for your commitments and your usual wants during any given month. I recommend that the emergency money be placed in an online savings account with an institution like Ally Bank. This money should be liquid, so no CDs. Don’t expect to make much in the way of interest on this account; its goal is not to make money, but, rather, to have direct access to liquid capital when you need it for an emergency. If you are thinking, ‘I don’t need an emergency account because I have an equity line or credit cards,’ NO! Just no. Access to more debt is not an emergency fund.

man at laptop doing online banking

Third, you need to establish a checking account and a savings account to run your household finances. They should be held at the same bank because you will use them together throughout the year. The checking account will receive income (your paycheck and other money flowing in) and will be used to pay expenses (your bills and other money flowing out). That's all. But because NO two months have the same exact expenses you will also need a "buffer" account. Your "buffer" is the savings account.

I would recommend you start this savings account with around 10% of your annualized spending as a balance. For example, if you spend $50,000 a year, then your starting "buffer" balance should be $5,000. You will use it when annual expenses, like HOA fees or property taxes, pop up or if you spend a little more in July than you did in June. You would simply transfer money from your "buffer" savings into your checking to cover the extra monthly costs. Ultimately, you are not trying to make these bank accounts grow. You are trying to use them together to manage household cash flow over a year period. If everything works out as planned, at the end of a year you should have the same balances in both accounts as when you started. If you have more money than when you started, you should apply the additional dollars toward your financial goals. If you have less money than when you started, then you should save a little more to start the next cycle.

signing estate documents

Finally, the last step of phase one is making sure that you have adequate life and disability insurance and that your basic estate documents are in place. If you are young, and thinking about delaying the estate planning, don’t. As a wise man just told my wife last week, “Everyone has an expiration date. You just don’t know when it is.” I can tell you from my personal experience, as well as from that of clients, it is extremely difficult to handle the healthcare decisions and finances of someone who has not planned it out for you. It’s not a burden you want to leave anyone, much less the family you love so dearly, so don’t skip this important piece.

That concludes Phase One, Operational Setup. Here is a summary checklist so you can get started today:

The Money Checklist Phase 1 list

Head over here to continue reading The Money Checklist Phase 2 where I cover debt, retirement, & college. In the meantime, call me with your questions at 843-972-4402 or schedule a meeting with me here.

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