Climbing the (financial) ladder
Remember the financial ladder template? Hopefully it gave you a sense of where you stand on the scale of financial independence. That's good, but you may be asking, "OK...but how do I get from where I am to where I want to be?" An excellent question! Here are some tools for your tool belt.
Don't skip steps
The ladder is specifically designed to provide backstops along the way -- rungs that keep you from sliding back down. Insurance and emergency savings are particularly good at this. Be wary of skipping the boring rungs in favor of the shiny ones!
In particular, I know that the 401(k) match rung is a particularly attractive one -- after all, it's free money, even if it is going into your retirement account. And for some people, it may indeed make sense to grab their employer match before tackling some of the earlier rungs. That said, please be very careful of investing to your employer match, especially in the following cases:
You don't have basic insurance (though this should be easy to solve)
You don't have at least "starter" emergency savings
You don't consistently spend less than you make -- and I mean consistently. If you had a month-to-month balance on any credit card over the past year, be cautious! I'd be extremely wary of putting money towards investments before you get your spending in line!
That all said: this is your financial ladder. Ours is just a template, to be customized according to your particular situation!
Keep the next rung in mind
Once you've settled on where you are, simply being aware of the next rung will bring a focus, and that's helpful in and of itself! If you're thinking about emergency savings and debt and long-term savings and investments, you can lose focus and not make real progress on any of them.
That said, forgetting the other rungs is only half of it; you still need to keep making progress towards that next rung. It's great that you're "working on" emergency savings, but make sure you're making progress -- rung 12 is where magic starts to happen!
Don't forget short-term flexibility
On the subject of not "falling down the ladder", make sure to prioritize short-term flexibility. This is where the "50" part of the 50/20/10 rule comes from: by keeping non-discretionary expenses low relative to your income, you improve your ability to handle threats and opportunities as they come at you, without losing progress towards your long-term goals.
Track your spending
Even if you naturally spend less than you make, managing your cash flow is one of the best ways to speed up your progress towards your next goal. If the idea of budgeting intimidates you, though, don't fret! Just start by tracking your spending. Don't try to direct it yet; simply keep an eye on where it goes. Often being aware is enough to change your spending significantly!
How to track your spending? If you're a Seaborn client, you can track it via your Seaborn account. Mint is a good and free app, as well. If you're going to move beyond tracking your spending, though, I recommend You Need A Budget -- see below!
"Give every dollar a job"
Zero-based budgeting is an extremely effective tool for making sure your money goes exactly where you want it to. The envelope method is the classic way to get that done; there's nothing like cash to make absolutely sure you're not spending money you don't have! If you're more technology-minded, though, and want to do zero-based budgeting on all of your finances, I highly recommend YNAB. I talk more about their Four Rules in another article, but let me just say that I have seen YNAB change people's lives -- my own included.
This is a great way to get a boost through the savings- and debt-based goals of rungs 8-10. Got stuff you don't need? Sell it! After all, as many of my clients have heard me say: "'need' is such a strong word." I know several couples who have only one car; it's inconvenient at times, but they've made it work well, and it's been a huge boost to their finances! Craigslist is still a great free site, though of course eBay is great for items that would benefit from a wider audience (and can be shipped).
Be intentional with your employer stock
Got an employer stock purchase plan, restricted stock units, or other employer stock grants as a regular part of your compensation package? Be intentional with it! It's all too common for tech professionals to treat their employer stock like some kind of volatile savings account, rather than having a system for figuring out exactly what to do with your stock once it vests. (Confession: I did exactly the same thing when I worked at IBM, so don't feel bad!)
Instead, look at where you want to go on the ladder, and see if your stock can help you get there. Need to create that emergency savings? Hit a short-term or long-term goal? Use your employer stock!
But what about taxes? With RSU's, the fair market value of your stock at vest is considered ordinary income anyway, so you may as well sell them immediately. With ESPP shares, it can be a little more complicated; see my three-part series on them for more details. (Spoiler: I would never consider anyone foolish for selling those immediately, as well.) In either case, do make sure you have money set aside or withheld for taxes, of course.
And yes, hire a financial advisor
If you really want to accelerate your progress up the ladder, we think it's a good idea to hire a financial advisor. (Surprise, surprise, surprise.) In all seriousness, "getting you where you want to go financially" is practically our job description! Of course if you're at rung 12 or higher, a financial advisor is often an easy alternative to lighting your money on fire. But what if you're still working on savings, or knocking down debt? Well, the good news is that an increasing number of financial advisors (including us) are offering low-cost services to help you get through those rungs, as well! HuffPost has a good article on when to hire a financial advisor -- and yes, we're quoted, but don't let that deter you!
I know a lot of you are wary about hiring a financial advisor -- I would be, too, and I am one! If that's you, take a look at this article on how to find a good one who specializes in clients like you.
Got another tool you'd like to see added to the toolbox? I'd love to hear about it -- leave a comment below!
Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.