I often preach about having a financial plan, a budget, and goals.  However, I realize having a plan is much easier said than done, and while many of us have goals, knowing what we want isn’t always enough.  Most of us struggle with debt, or have hard time putting money toward our savings.  It’s easy for me to get on my high horse and tell others to spend less than they earn, but in truth it’s much harder said than done.  While I’ve never had issues with credit card debt, I did for years after college spend pretty much everything I earned.  I would often think about coming up with a financial plan, but I never did.

I didn’t really have much of plan until a few years ago at which point I was actually in pretty good shape.  Being able to sit down and formulate a plan is great, but if paralysis by analysis prevents you from doing anything then it’s better to move forward without any kind of set plan.  That’s what I did.  I didn’t set any goals or ask myself what I wanted to do with my financial life. I just turned the screws. I increased my contributions to my 401k from 10% to 15%, and I opened an ING Savings account and started diverting an additional 10% a month in sync with the direct deposit from my paycheck towards that ING account.  Those two items took me about a half hour to do.  5 minutes to change my 401k contribution rate, and 25 minutes to open and set up an automatic savings plan for the ING account.  I diverted 15% (or closer 13% of after tax income), but that number will vary for everyone.  Whatever that number is, it should be doable.  There is nothing worse than being overly ambitious and failing.  As a quick rule of thumb, I would divert 20% of your gross income left over after housing and debt.  So for example let’s say you paid 30% towards housing and another 20% towards student loans, that would leave you with an “excess” income of 50%.  I would suggest diverting an additional 10% towards automatic savings. Just make sure whatever that number is passes your gut check and is more than few coffees.  Take that money and do one of the following.

Increase contributions or open up a 401k

  • Set up a savings account and make automatic deposits. I use HSBC and ING.  There are banks with better rates but those two have been around the longest, and offer a stable platform to launch your savings empire.  You can always chase rates later.  If you want a referral to ING which will net you $25 if you make a deposit of more than $250, email me at dong AT askdong.com.
  • Open Mutual Fund, and start making automatic investments
  • If you have credit card debt, cut up the card, and setup automatic payments in excess of what you would normally pay
  • Change your student loan plan to make increased payments
  • Make extra payments on the mortgage

There are many other financial actions to be taken such as opening Roth IRA account which many would argue should be a top priority. What distinguishes the actions above is that they all force your hand by automatically pulling money from your pocket or in the case of cutting up the credit cards prevent you from spending money that you might not have.  By nature I’m a procrastinator. I don’t do anything until I have to do it. So when I was daydreaming about having a plan that’s all I did - daydream. However once I actually found that I had much less money to spend in my bank account, I started thinking not only about how I could better spend my money, but what I really wanted to do with that money.  Sometimes it takes a good kick in the pants to get the financial engine started.