A Complete Framework for Financial Planning

Here it is, all in one place: How to manage your finances. The following information is all most people will ever need to know. It's very simple.

Yes, it's complicated too; I could write a book on each of the following bullet points. So if you want more detail on a particular subject then go ahead and read one (here's a list of good finance books). Most personal finance books say the same things, though. And it all boils down to the following, convieniently summarized list of steps.

Set Up a “Budget” and Make Saving Automatic

• This just means to decide on your savings goals and have investments deducted from your paycheck/checking account automatically. Then organize your lifestyle and expenses around what’s left.
• Good Target: 20% savings; 70% committed expenses; 10% fun money.

Pay off debt

• Mortgages/student loans are “good” debt, usually at low rates and with tax advantages. Just make payments on time unless you’ve completed all the other steps. Then accelerate payments.
• Credit cards/other loans are usually "bad debt" that tie up your cash flow and delay your ability build wealth. It should be paid off completely ASAP, from highest to lowest interest rate. Start paying extra on this debt after maxing a Roth IRA OR getting a 401k match, but before establishing an emergency fund.

Establish/Maintain an “Emergency” Reserve Fund

• Why? Unexpected expenses always come up—medical expenses, fender-benders, gifts, vacations, etc. You don’t want to have to tap long term savings or credit cards for these things.
• Where? Keep this money accessible but earning high rates— the best high yield savings accounts and money markets are currently topping 5%.
• How much? Keep 3-6 months worth of expenses in this account so you can maintain your lifestyle if you decide to quit (or lose) your job.

Save for Retirement

• Why? Obviously, no one wants to work forever—or rely on their children to support them.
• Where? Utilize tax-advantaged retirement accounts (401ks/IRAs).
• How much? First make sure you get your employer’s 401k match. Then max out a Roth IRA ($4000 in 2007). Then continue to increase 401k contributions until you max that out ($15,500/yr in 2007).

Establish Funds for other Goals

• Short term goals: Just add to your emergency fund or start a separate high yield savings account.
• Long term goals: Diversified stock market index funds
• Special goals: 529 plans for college savings, trust funds for estate planning, etc.

Additional steps to take:

• Establish good credit; you need it to qualify for low mortgage rates, apartments, and even new jobs.
• Maintain excellent insurance coverage—health, disability, and car and home are essential. Set up life insurance (as well as a will and revocable living trust) if you have any dependants.
• Give generously; it’s an important foundation for our society and good for spiritual well-being to give to those less fortunate.

That's pretty much it. If you manage check off most of those items, then you are much better off than the majority of Americans. If you feel like you can't do any of that or if you'd like to do it faster, you probably need to get educated and/or increase your income.

Once you feel like you're comfortably on track financially, don't stop there! Start planning and implementing wealth building strategies!