MoneyMonday: Money Milestones: The Financial Stages

We are going to cover a lot of ground today but don’t get overwhelmed. The journey to financial freedom is a journey of a thousand steps. The best thing you can do is identify – and take – the best next step. We hope this workshop helps you determine what the best next step is for you.

Speaking of financial stages, we think of financial life as unfolding in three stages. The first is Financial Safety where the focus is on building a good financial foundation. Next is Wealth Accumulation where we work on gathering resources for the final stage, and Financial Freedom where we have the money and resources, we need to do the things that bring joy and fulfillment to our lives.

This session is all about these three stages.

Let’s get started with Financial Safety.

When folks are in the financial safety stage, we hear them say things like... I feel like I’m just treading water when it comes to money, or I don’t feel like I’m in control of my finances.

You may wonder how everyone else does it or might wish you had a plan for reducing debt. Maybe you need to rebuild your credit. Finally, a common concern in the financial safety stage is wondering what would happen to your family if something happened to you.

Here is a list of the best next steps that will take you through this foundational stage.

Create a spending plan save $1000 in an emergency savings account save enough in a Health Savings Account or separate savings account to cover your health insurance deductible eliminate unnecessary expenses so you can put your dollars to work in the areas that matter most build and protect your credit purchase basic life insurance

And finally, start saving for retirement.

In our Start Smart workshop, we walk through building a spending plan in detail but here are general guidelines on how much of your monthly paycheck should be dedicated to the various components of your budget.

For example, try to keep housing, food, and utility expenditures to less than 40% of your budget. That means you might need to buy a little less house than the real estate agent is suggesting. Or, you might need to wait a bit longer so you can make a 20% down payment and avoid the extra costs of Primary Mortgage Insurance or PMI.

Also, note that emergency savings are a significant part of your budget at this stage. If you remember nothing else from this presentation, remember that having an emergency savings account is the single most important thing you can do to protect your financial future and build a solid foundation in your financial present.

Some things are worth repeating and the importance of having an emergency savings account is one of those things.

Start by setting a goal for how many months you want to allow to reach the goal of having $1000 in your emergency account. Divide the number of months into $1000 and save that amount each month. Or, better yet, divide $1000 by the number of paychecks you’ll receive over those months and set aside money each pay period.

Also, plan for unexpected medical expenses. The math here is pretty much the same. Determine what your annual deductible is for your health insurance. Set a goal for how long you want to allow to reach this goal and then begin setting aside the necessary dollars each pay period.

Setting money aside is one thing. Keeping it is another. A good exercise for personal financial discipline is to define situations when you will allow yourself to use your emergency savings. This helps you remember that buying gifts at Christmas isn’t the same kind of emergency as putting four new tires on your car in order to pass inspection. You can build your spending list in your Money Milestones workbook.

Finally, when it comes to cutting unnecessary expenses and digging up dollars for the important stuff, being honest about the difference between a financial need and want matters. Review your regular spending and identify things you can cut. Pay special attention to automatic charges, especially for apps or subscription services. For example, if you signed up for a streaming service just to watch the latest series, be sure to cancel it if you aren’t watching regularly.

So, how will you know you are moving on from this stage and into the next?

Well, you will have at least $1000 in your emergency savings account.

You will have your debt under control which means you aren’t accumulating new debt and you have implemented a plan to pay down any existing debt. Check out our Living Debt Free workshop for more on this milestone.

Next, you’ve started saving at least 5% of your income for future goals like retirement. And you’ve secured basic life insurance to ensure your loved one would survive if the worst happened.

Then it’s time to pause. Look back on your accomplishments, and celebrate the milestones reached. This will give you the motivation to continue on with your financial journey of a thousand miles.

With that, we are moving on to stage 2, wealth accumulation.

If you’re here, you might be wondering if you’ll be able to retire on time or thinking about saving for your children’s college. Maybe you wonder about things like investing or paying down your mortgage. Perhaps you’re wondering what would happen if you lost your job or experienced a long-term illness. Or maybe you have visions of a dream vacation or a second home. Or questions about insurance.

If this sounds like you, and assuming you’ve checked off the key steps in financial safety, you’re probably in the wealth accumulation stage.

While getting your retirement savings started was a step in the safety stage, now you should be aiming to save 10-15% or more in your 401k. Also, be more aggressive about paying down high-interest debt and build your emergency savings up to 3 months of your living expenses.

Now is also a good time to complete a retirement projection to figure out if 10-15% will get you to the finish line at your ideal retirement age. Also, odds are your financial obligations have increased – maybe you have a spouse or partner, children, a mortgage, etc. So, it’s also a good time to evaluate your insurance coverage and add more in areas where you have more risk.

You can also begin looking ahead to goal-based investing for things like buying a second home, starting a business, etc. And, as your investment accounts grow, you may want to also grow your investment knowledge.

Since retirement is probably your single biggest financial goal, retirement savings are a primary focus of this stage. Aim to increase your 401k savings to the level necessary to get the full match from your employer. Compare that to what you’re saving now and increase your contribution as quickly as possible.

If your employer does not offer a match, reach for a savings level of 15%. And if you are not where you need to be yet, remember… next best step. Set a goal to increase your savings rate by 1-2% each year. At that level, you probably won’t notice the change in your take-home pay, but as time flies by, your retirement savings account will really thank you.

The three key components of this stage are…

increase your emergency savings from our financial safety goal of $1000 to our wealth accumulation goal of 3-6 months of living expenses. Like before, set a goal, give yourself a deadline, and then figure out how much you need to set aside each paycheck to get there.

Next dream a little. Setting a big goal that’s more immediate than retirement will go a long way to keeping you motivated. Maybe you can reward yourself and your financial discipline by taking a big trip – maybe heading to Yellowstone, Europe, or Disney.

Finally, we can’t reach financial freedom if we still have debt. Especially high interest or variable-rate debt. So, this is a good time to implement a debt-elimination plan. Our Living Debt Free workshop dives into this topic in detail.

What does progress look like in the accumulation stage? Well, your retirement savings rate will be enough to get your full employer match and will be approaching 15%. Hopefully, you’ve also completed a retirement projection.

Your emergency savings account holds a healthy 3-6 months of savings. At this level, it might be tempting to invest those dollars to earn more. But don’t give in to that temptation. Emergency savings play a very different role than your investment dollars. We need to be able to access these dollars quickly and we can’t afford any exposure to the ups and downs of the financial markets because we have no way of timing a financial emergency.

As you move out of this stage, you've also evaluated your insurance needs including life and long-term care insurance. Our insurance 101 session walks through the various types of insurance in detail.

Finally, to be ready to transition to financial freedom, you will have to put your high-interest debt behind you. Note I didn’t say ALL debt. Some debt is really just leverage. For example, if you’re a little short on your retirement savings, there’s nothing wrong with carrying a low-interest mortgage into retirement instead of spending investment dollars, which typically earn more than you’re paying in interest. 

“Being rich is having money. Being wealthy is having time.”

In stages 1 and 2, it’s tough to appreciate this quote. But, as you enter the financial freedom stage of this journey of a thousand miles, I bet this will resonate with you. By taking time to build a strong foundation and living with financial discipline, you will reach a stage where it’s no longer about the money but rather what the money can do for you.

aIs buying time by retiring and generating your own paycheck from the assets you’ve accumulated. It’s having resources to prioritize enjoyment and fulfillment for yourself and others. It’s creating a legacy and taking action to ensure it’s a reality.

How will you know if you’re seeing the light at the end of the tunnel? Well, you might feel like retirement is a possibility but you’re wondering if you have your ducks in a row. You probably have adequate insurance in place but wonder if you should be using insurance as part of your estate plan. You worry less about spending money and more about spending time. Perhaps you’re thinking about downsizing your home or feel like you should update your estate documents. Maybe you simply wish you had more time to volunteer and give to things and organizations you’re passionate about.

The essential best next steps within the Freedom stage are…

fine-tune your retirement plan and try to maximize your 401k and IRA contributions. Also, since you can spend HSA monies in retirement, also aim to max out your HSA if you have one. Check out the Understanding Your HSA workshop for more on this topic.

Build your emergency savings for up to 12 months. Even though this feels like a lot of money to leave in a low-interest savings account, this is a mission-critical part of navigating market volatility when you begin to rely on personal investments for your paycheck.

Also, talk to an advisor about building a strategy for collecting your Social Security. It isn’t as straightforward as “take it as soon as you can get it.” Our Social Security Basics is a good workshop to check out.

Begin to consider housing options too. While it’s tough to leave the five-bedroom house you raised your kids in, most folks who join a retirement community wish they’d done it sooner. Doing it sooner frees you from lawn work and home maintenance so you can take those trips you’ve dreamed of. It’s also great to give yourself time to meet new friends as your social network is critical as you grow older.

Finally, while it isn’t pleasant to think about, updating your estate documents is one of the most important things you can do for your loved ones.

Let’s take another minute to talk about retirement…

Even if you’ve been a disciplined, long-time saver, it’s wise to test your plan. If you find you aren’t on track, you’ll need to decide whether you want to work a little longer or spend a little less in your golden years. The Retirement Income Planning workshop has more info on this topic.

The essential steps in the Freedom stage are to max out savings and investment opportunities in retirement and HSA accounts.

And while most of our conversation has been about planning with money, now is the time to plan for time because you’ll have more of it in retirement. In fact, one of the most common reasons folks delay retirement isn’t lack of money, it’s not knowing how they will spend their time.

Be sure to get your estate plan in order. Check out our Estate Planning Basics workshop for more info.

Finally, don’t forget to plan for joy! This is the time to think about hobbies or volunteer opportunities you may want to pursue in retirement.

And those are the three financial stages. I hope you will check out the Money Milestone workbook which will help you better understand which stage you are in and what steps to take so you can keep your financial journey moving ahead.

In closing, I’d like to introduce another fundamental tool that will help you prioritize your own best next steps. We have organized the critical steps within each stage into a financial need’s hierarchy. Just like the stages themselves, the hierarchy is based on Maslow’s hierarchy which explains that you must meet basic needs first before you advance to a higher purpose and more fulfilling tasks.

For example, the first time you see emergency savings on the hierarchy, the goal is to save $1,000 but eventually you want to save enough to cover 3 months of your living expenses. Similarly, we recommend paying down high-interest debt before tackling low-interest debt.

Another thing to notice is that between paying down high-interest debt and low-interest debt, the hierarchy encourages you to focus on saving and investing.

With that, we are back where we started… with a focus on taking just the best next step. Google is full of advice. So are family and friends. But not all advice matches your situation.