Long Term Financial Goals
If you aren’t broke and are reasonably comfortable (which is certainly possible with a software development job) then it’s easy to stop paying careful attention to your finances. However, many people in the industry find that not only are their finances tight, but that they have trouble saving for larger goals (such as retirement) and they often find that they are just a paycheck away from major financial problems. If anything, the last year SHOULD have taught you to seek more financial resilience in your life and to be better prepared than you were.
However, even the preparation is a struggle. Financial considerations are not “fun” to think about for most normal people, even though they are absolutely critical. Further, the amount of information out there about finances is often so extensive and complex that you’ll often struggle to figure out what to do next, even if you are otherwise sufficiently motivated. You may also find that your long term financial goals conflict with your short term desires (or even your living requirements). Financial issues can often highlight very uncomfortable situations in your personal life (such as a difference in worldview between you and your spouse). However, you still need to deal with this stuff, or you risk it becoming a problem at an inconvenient time.
Finances are one of the things that can improve or destroy your quality of life. They are also pretty easy to ignore if you are otherwise comfortable. However, if you don’t pay attention to them, financial issues can quickly wreck your plans and ruin your life if you let them. Managed properly, however, your finances can often allow you to achieve your dreams, retire earlier, or even make it possible to live a vastly different life than what you expected.
Build an emergency fund.
An emergency fund of 3-12 months worth of living expenses should be your number one priority. Not only does such a fund make it easier to deal with surprise expenses, but it can greatly improve your confidence. Essentially an emergency fund makes it possible to take some calculated risks that might otherwise be impossible. It also makes it easier to absorb surprise expenses, such as automobile expenses, or sudden taxes. If you are single and willing to cut expenses to the bone, you can get by with a smaller emergency fund. If you are older, have a family, or have a more specialized career path, you will probably want to have a larger fund. It all depends on your risk tolerance.
Track and analyze your expenses.
Tracking expenses is one of the best things you can do for your finances. Not only does it help you identify your actual spending patterns, but it can also help you detect issues such as fraud. Being aware of how you spend money can often change your spending habits for the better. Things like going out to lunch every day can really add up and you are probably not aware of what it is costing. Further, if you look at what you could have done with that money instead, you may well find a better use for it. Analyzing expenses isn’t just about reducing expenses. Rather, it’s about the value you get from those expenses. There might be something better you could do with the money.
Break down and prioritize your debts (if any).
While interest rates are low, debt is not the worst thing in the world, and can often be useful leverage, depending on what kind of debt it is. However, debt has to be managed. You probably should prioritize getting rid of at least some of your debt, especially if that debt isn’t particularly useful for your long term goals. For instance, credit card debt is often not used for things that actually significantly improve your life and has a high interest rate – you might want to prioritize getting rid of it. Debt prioritization is important, because it allows you to figure out which debts are the most critical to get rid of quickly, so that you can roll any extra cash into paying it off. Don’t forget that some debt can be discharged in other ways. There is often a way to get debt forgiveness or better terms for paying off the debt. Look into this, as it could potentially save you a lot of money, time, and frustration.
Get a credit report / credit score and improve it.
While you may think that you have a good idea of your financial situation, it’s easy to miss things such as fraud, debts that you thought you had paid off, and incorrect credit report entries. These can hurt you big time when you take out a loan, so it’s better to find out about these things and deal with them early. Getting a credit report can also be useful for figuring out what you need to correct. For instance, if you have a history of late payments to the point where it shows up on a credit report, it would be advisable to sort that out. Credit reports are pretty complicated and vary a lot between countries, but they are essential for getting a clear picture of how you are seen by potential lenders.
Build a budget and look for ways to decrease your expenses.
With the information above in hand, you should start trying to budget out your expenses. This doesn’t have to be a detailed budget with charts and graphs – literally a rough breakdown on a napkin can be enough to get a rough idea in your head. As you start to realize what you are spending money on, you’ll often find that you are spending a lot more on certain activities than you intended. That’s the point of the exercise – budgets don’t have to be about depriving yourself. Sometimes just knowing that you overspend in certain areas can be enough to change your behavior. However, you should still make a list of ways to decrease your expenses, even if you don’t act on it. This list can be a godsend when you find yourself out of work, as it allows you to quickly and systematically reduce expenses so that your savings last longer. If you make a list when you are relaxed and not stressed out from a job loss, it reduces the mistakes you make.
Re-examine (or start) your retirement plan.
Very few of us plan to die at our desks. Retirement is the socially acceptable way to avoid this. However, to retire, you will need to have enough money to be able to cover your daily expenses when you can’t work any more. The earlier you start your retirement plan, the better off you are. Interest compounds and starting early means that the interest works for you. It also gives you more time to adjust to market conditions, which might be pretty rough soon. The other thing about retirement planning is that it forces conversations about how you would like to live when you are too old to work. These conversations are valuable to have with your significant other (especially), because you might not really understand what the other person wants until you discuss it. You might not be able to contribute much to your retirement account starting out, but the important part is getting into the habit and avoiding lifestyle inflation.
Look for ways to increase your income.
While it’s always good to try and reduce expenses, save more money for the future, and get control of your finances, inflation will still start to really hurt your finances if you don’t manage to increase your income. Additionally, if you are like most people, your expenses are going to increase over the years, regardless of how careful you are about your expenses. The price of everything is always going up, and life events are likely to also increase your expenses (marriage, birth of children, kids going to college, medical expenses, etc.). Any increase in your income can be used to help pay down your expenses or to save for larger goals, such as starting a business, buying a house, etc.. It shortens the amount of time it will take you to reach your longer term goals. This might involve something as simple as changing jobs (or asking for a raise), but it can also include things such as picking up some contract work, building a product, or even learning new skills that you suspect will be marketable in the future.
Look for gaps in your insurance and deal with them.
The first of the year is a good time to review your insurance policies to make sure that you are still covered well if anything has changed. While you should also be watching for things that change your insurance during the year (such as buying a house), it’s still reasonable to check this stuff at the beginning of the year to make sure you didn’t miss anything. This is also a good time to look for a better deal on insurance. Due to changes in regulations, changes in your life, and the tendency of insurance companies to avoid changing policies in a way that benefits their clients, there is often a lot of potential for saving money.
There are a few areas you should consider. You need health insurance, vehicle insurance (if you have one), and homeowners (or renter’s) insurance. Considering the previous point, you should probably also have life insurance. This is also a good time to make sure that you have contact and policy information for the various policies you have in a place you can get to it. For instance, you should keep your health and vehicle insurance stuff in your wallet/purse, while your homeowner’s/renter’s insurance information should be kept at both your residence and in an offsite location (in case the first one is destroyed). It’s probably also useful to keep this stuff in some digital format as well, such as in dropbox.
Define and refine your long-term financial goals
It’s pretty common for busy adults to stop reconsidering their long term goals, especially as life gets hectic. Your life goals at 25 are probably not the same as your life goals at 45 (or if they are, they might have changed at 35 and changed back). Regardless, periodically re-examining your long-term goals is healthy. This is especially true of financial goals, as these are easily ignored once you are comfortable enough. If your goals haven’t changed, now is also a good time to re-evaluate your progress towards those goals. Have you made any progress at all? After last year, especially, there’s a good chance that you had some difficulties in achieving your major goals.
Now is a good time to reflect on your progress. Whether you have moved forward on your financial goals or not, now is a good time to adjust your financial plans (or actually make some). If you find your goals seem unachievable, this means that you need to decide whether you are going to do what is required to make the goal happen, or whether you want to drop it. Don’t be too quick to give up on dreams, but be careful that you don’t waste time going for goals that are mathematically impossible.
Figure out your bad financial habits and come up with a plan to fix them.
At the beginning of the year, when many people are considering forming new habits, you probably also have some really good ideas about things you could do to avoid wasting money. Spend some time brainstorming these. Note that while there are lots of obvious ways that you are probably wasting money, the non-obvious ones can often be a lot more expensive. Things like health issues, home/car maintenance, and career planning can cost a LOT more money than things like avocado toast and lattes. Sometimes, the most expensive thing you can do is NOT spend money. After you have the money to meet your basic needs, sometimes it’s more efficient to pay for someone else to do the “lower value” tasks so that you can concentrate on things that make more money.
Tricks of the Trade
Each of us have different areas of our finances where we need work. Be it starting out and setting up an emergency fund or planning for retirement. We have different goals and areas of focus. This is also the case when it comes to other areas of our lives. I recently had a heated debate with one of the other tech leads at church. We both have strong opinions and are passionate about what we do, however we come from different perspectives. She’s got a background in database structure and security whereas my career has me finding doing a lot of research and development to find new ways of doing things. Her focus is more on stability whereas mine is on innovation and exploration. That leads to some very differing opinions on things, but when we work together I’m able to find new ways or techniques and she’s able to take them and make them viable for the long term.
I say all of that to show that even though we come at the world from different view points we are able to work together. It can be frustrating at times, especially if you don’t recognize the value of the other person’s role. As a limit pusher I get frustrated with those who don’t want to try new things, whereas those who are focused on stability are annoyed by my ever present excitement about the new thing I discovered and how much I can’t wait to try it out. What I’m getting at here is that a little bit of mutual respect goes a very long way to maintaining those relationships whether they be at work, volunteering, or friendships.