Life Stage Planning – Mile Marker #1: ESTABLISHING YOUR PLAN

Mile marker #1: Establishing your plan.

Buying a first home, starting and supporting a family, paying off debt—if you are in your 20s or 30s, your financial obligations may seem larger than your income. But here's the good news! You're in the best position to put the power of compounding to work for you.

The best way to free up money to invest is to get a grip on spending. Use your checkbook register, credit card statement, etc. to review your income and spending history for six months. Don’t think of this as budgeting…think of it as a spending plan. Once you determine how much you can spend for groceries or at the mall, use a shopping list and stick to it. Eliminate impulse spending. Pay yourself first; set aside 10% for savings and investments before you spend the rest of your paycheck. Set aside money each month in a short term savings to pay for annual bills, such as Christmas, taxes or insurance. Find ways to cut Income Taxes. Establish an emergency fund that you can get to quickly and easily to see you through a financial crisis.

With a solid spending plan and emergency fund in place, you will be able to create an investment strategy. Understand your own tolerance for risk. Then fund an IRA and, even if you don't qualify for a deduction, get the benefit of tax-deferred compounding of earnings. Also sign up for any employer's retirement plan, which will give you two major tax breaks: contributions are pretax and earnings are tax deferred until withdrawal. If a company match is available, invest enough to meet the amount they will contribute. Avoid borrowing from a retirement plan. Don’t cash out when you change jobs; this can result in taxes, penalties and the loss of tax-deferred growth. Avoid cashing out unless it is an absolute financial necessity. Choose not to spend the money now, because you want to put it to other uses later. Roll the money over into your new employer’s tax-qualified plan or into an individual retirement account.

At this stage it is also important to make sure your loved ones are protected financially by getting adequate life insurance coverage.