We are at the time of the year where we turn the page on what has been written, and set our eyes on the new, unaccomplished goals that we want to achieve. With our finances so tightly intertwined into our lives and wellbeing, it is tough to imagine a better resolution than building a solid financial foundation. This can be a daunting task, but with a carefully laid out game plan and proper execution, it can lead to wealth, prosperity, and a sense of peace. Getting your financial house in order requires diligent budgeting, emergency savings, eliminating debt, and investing for the future.

The Budget:

The term budget might seem like a curse word to many, but it is the foundation of any sound financial plan. The budgeting process is a household activity (spouses discuss together!) that should occur every month, including planning the next month’s income and expenses and assigning each dollar to a budgeted category. Income that exceeds expenses should still be budgeted to a line item, whether it be funding the emergency fund, saving for a car, or contributing to your Roth IRA. The final monthly budget should have every expected dollar of income assigned to an expense/savings category. This type of budget is referred to as the “zero based” budget, where we are giving every dollar an assignment.

The Emergency Fund:

Let’s face it—it isn’t a matter of if it will rain, but when. That is where the emergency fund comes in. Think of this fund as an insurance policy against the unexpected. Whether it is a pandemic, a job loss, a blown tire, or a broken washing machine, your emergency fund has you covered.

A good rule of thumb is to set aside 3-6 months of expenses (which you now know, thanks to your budget), no more, no less, in a savings account. A married couple with one of the spouses staying home to watch the kids might want closer to six months, whereas a married couple where both work and with grown children, might want closer to three. There isn’t a right or wrong answer here, but it is very important that this step isn’t skipped.

Debt Management:

Your income is the most powerful tool in your wealth building arsenal; the more you keep, the more you can save and invest.

The first step in eliminating those pesky payments is to stop borrowing money. This can be a difficult concept to grasp because borrowing and overspending is so normalized in our society, but it is stealing from your future. The fact that you can put nearly anything on payments is mind blowing, and it should make you think twice about how you are “benefitting” from it.

So, you stopped using debt, but what is the best way to eliminate it? I recommend using the debt snowball. Pause any saving and investing, and list your debts (except the mortgage) from smallest balance to largest balance and pay the minimum payment on all. Every dollar you have extra in your budget should go directly to the principle of the smallest debt. Once that debt is cleared, take that entire amount and add it to the principle of the next debt.

Some of you might be wondering why we wouldn’t list by interest rate, which is a good question. The answer is because this isn’t a math problem, it is a behavior problem. When you get quick wins, you build momentum and the process becomes easier, and your chances for success become greater.

Saving and Investing:

Once you’ve eliminated your debt, you are now in full control of your income and it is time to put it to good use. Now is the time to put 15% of your gross (before taxes) household income into tax favored retirement plans. There are a lot of options here, but the best place to start is likely your employer’s 401(k). If there is a Roth option, I strongly recommend contributing to this account, if possible.

If your employer has a Roth 401(k) option and matching, you can likely take care of your full 15% in that account (matching dollars are not eligible for Roth treatment).

Next, if you have children and are planning on helping them pay for school, now is also the time to open a 529 plan and start contributing systematically.

You might be wondering about pre-paying tuition as an option here. Tuition costs typically outpace inflation by a significant margin, but by prepaying you lose the investment flexibility that you would otherwise have.

Paying Off the House:

Finally, any extra money in the budget can and should be used to pay off the home mortgage early, if this applies to you. If you are wondering what the pros and cons of doing so might be in a low interest rate environment. If you can eliminate that, then you have more freedom to use your savings as you see fit during your retirement years.

Final Thoughts:

The information in this article is easy to understand, but difficult to execute. It requires discipline, team work, and focus to pull off, but it is entirely doable. When you have full control of your finances, you have options, and when you have options, you aren’t forced into making decisions that you don’t want to make (think quitting a job you hate). Unfortunately, most new year’s resolutions don’t last, so I challenge you to embrace the information in this article and make it a way of life.