In Stage Three, you made some very important things: a list of all your debts, a plan to pay them off and a spend plan or budget that would make the whole thing work. This spend plan, and your ability to stick to it, is your SAVINGS ENGINE. It is time to solidify it for the long term.
First, if you are not yet out of debt (and that can take a long time), double down on your efforts. Get a second or third job, cut back further on your expenses, sell everything, and do what you need to to put more towards your debts. Run, do not walk, out of debt as if your life depends on it – because it does.
Second, if you are debt free (good job!), it is time to think about the funds you will need in the future and save, save, save. Only you can define your goals, but here are some examples…
going back to school for a degree
having children
becoming independently wealthy
putting kids through college
remodeling your home
buying a home
paying off your mortgage
moving to another city or state
buying a car or new piece of technology
retiring early
etc
You are sure to have near term goals and long term goals. Goals should be reasonable, in the sense of being achievable in this lifetime. That being said, do not dismiss an idea just because the only way you know how to do it is too expensive. Get creative and find ways that cost less and you can make your goals very reasonable and very achievable.
For example, you may want to save up to send your kids to college. Do they need an expensive out of state school? Probably not. Do you need to pay for ALL of it? No. Decide how much you will pay and be very specific. For example, if you have many children and cannot realistically pay for four years for all of them, you might offer to pay for two years for each of them, being very specific about what those two years will include. This is just one example. Understand that your goals may not look like anyone else’s and that is OK.
Keep a list of your goals somewhere where you can see them every day. Keeping track of your goals makes you less likely to sabotage your progress. The savings engine – your monthly spend plan that includes consistently putting money towards debt and then towards goals is the key to achieving any goal you can define. If you can consistently save a minimum amount per month, then you will eventually meet your goals! Consistency is they key.
Your savings engine (or debt payment engine) should be a critical line item in your monthly spend plan – a number that you track and report to yourself each month – how much did you put towards debt or save up for your goals? Can you do more? As the saying goes, “What gets measured, gets managed.” So measure your progress. You will find yourself automatically pushing harder to do more.
Consider prioritizing your goals based on what will come due first or other factors and tackle them one at a time, just like you did for paying off debt. Dave Ramsey’s baby steps recommend that a 4-6 month emergency fund, and then saving for children’s college and retirement should be important enough to be at the very top of the list.
Investments may help you put your savings engine into overdrive. Although investments are not without significant risk, over the long term, they can be a powerful component of your savings engine. When saving for retirement and other goals that are at least 5 years away, consider working with an investment manager, or getting smart on investments yourself, to make your money work harder. Compound interest is the key to major long term wealth and financial independence. A good financial manager, or your company’s retirement plan administrator can help you set up to send money directly into a retirement account from your paychecks as part of your dedicated savings engine. Read up on Dave Ramsey’s methods and recommendations for more ideas and advice.
