You’d be surprised how many smart people don’t have a financial plan. Don’t be one of them!
The more you earn, the easier it is to save. Unless, of course, you spend it all. The key is to create a place for your money before you earn it, before you even think about ways to spend it.
Envision you earned $1M this week. Now that’d be nice, right? Really think about it. Your company goes public and everyone gets a huge bonus, you win 5 numbers in the Powerball, you discover that old stamp collection your great uncle left you is worth a fortune. It doesn’t matter where it comes from – the point is, you now have $1M. What would you do with it?
If you’re thinking about which loans you’d pay off tomorrow, what car or clothes you’d buy, or how much you’d give your parents for their dream vacation, keep thinking. We want to figure out where you’d keep the cash if you had to keep it.
Think of things like 401(k)s, IRAs, Roth IRAs, taxable investment accounts, high yield savings accounts, checking accounts. See where we’re going with this?
Now divvy up that $1M – you might want $350k in the 401(k), $150k in the IRA, $400k in the taxable account, $90k in savings and $10k in checking, for example. (It’s hypothetical, so let’s not get hung up on contribution limits.) Visualize those accounts.
Imagine checking them every month, watching them compound and grow. Imagine sleeping well every night knowing you have enough cash on hand to last several years. Imagine feeling proud of yourself for having the discipline to earn and preserve that kind of wealth.
Ok, back to reality. You’re probably at least a few years from that kinda cash. But keep the end goal in mind, because it’s only a matter of time before you get there. That visual is a rough cut of your financial goals. You know which accounts to open, which ones to fund. $400k in an investment account won’t happen overnight, but every bonus, commission, or raise could help get you there. Once the account is open and growing, you’ll feel compelled to add to it over the years.
Of course, the $1M target is arbitrary – you could start with an even more ambitious goal – maybe $5M – or something more reasonable, like $100k. The point is, visualizing that stretch goal will help things along.
When you have a place to put future earnings, you’ll want to put them there.