What You Should Do With More

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Earlier this fall the U.S. Census Bureau released exciting data showing that real median household income grew an average of 5.2% in 2015 versus 2014. This represented the first statistically significant increase in income for the middle class since 2007. For the first time in almost a decade, most people have gotten a raise! This good news coupled with it being near the end of the year when sometimes employees are lucky enough to get a raise or a holiday bonus got me thinking that it might not be a bad time to suggest some things you might want to do with your additional income.

If you are fortunate enough to have additional income coming in, in general, here is what I would recommend you do, and in this order:

1. If you are getting a raise, do a little math and see how much more money you will be bringing in each pay period after taxes. That is valuable information to know as you consider your budget going forward.
2. Have some fun! Sure, I’m a numbers guy and a financial advisor, but I also know you only live once. Celebrate your hard work paying off and go eat at that new Italian place, buy that outfit you’ve had your eye on, or get that latest device. Now I’m certainly not suggesting you should blow all of your additional income, but I do think you should live just a little.
3. If your cash rainy day / emergency fund is still not up to at least 3-6 months’ worth of your living expenses, it’s probably a good idea to direct your additional income to rectifying the situation. It’s not an exciting use of assets, but trust me, you will be glad you have a cash safety net in place when life throws you a curveball, and it will!
4. As long as your modified adjusted gross income (MAGI) is below $132,000 if you are single or $194,000 if you are married and file a joint tax return, you should be eligible to contribute up to $5,500 to a Roth IRA ($6,500 if you are over age 50). This is a great way to save for retirement, and with any luck, your savings will compound over time into a larger tax-free asset.
5. If you have any high-interest credit card debt or you are close to paying off a student loan or car loan and that will erase a fixed, monthly expense, I’d suggest you plow your additional income into your liabilities. It will save you interest expense and improve your financial situation.
6. Top off your 401(k) or retirement plan. Unless you are already contributing the maximum amount, with additional income you should be able to contribute more to your retirement plan. This is a great way to boost your retirement savings and defer having to pay taxes on your additional income until you withdrawal money from your retirement plan later on.
7. Put some extra towards your mortgage or other long-term debt. Again, it’s not an exciting use of your assets, but it will save you interest expense and speed up your progress towards being debt-free!
8. If you are already charitably inclined, consider paying it forward and using your additional income for enhanced charitable giving, greater support of a cause you feel passionately about, or just helping out someone who you know could use a little help.

 

They say with more power comes greater responsibility. I agree, but I’d also say with more income comes greater possibility! If you are fortunate enough to have experienced a bump in your income or know you are about to get a raise or a bonus, use it thoughtfully. Have a little bit of fun, but also make it count!

 

-Tom

My Default Savings Plan

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I don’t know about you, but I often do better with a plan. To my wife’s credit, she’s helped me become more able to enjoy going along with an unexpected or unanticipated opportunity, but there are still some areas in my life where I need some “navigational buoys” so to speak. One of those areas is savings, and I don’t think I’m alone in that regard. Without a savings plan in place, money seems to burn holes in pockets and disappear.

With that in mind, I’d like to offer up my default savings plan. Now, this plan is not exactly what I always do, it is not what I always advise accumulating clients to do, and it might not even be what I’d specifically recommend for you, but I do believe it is a good place to start for most people. Here goes:

1. Try to live off of 60% -70% of your take-home pay. If you so choose, tithe or donate 10%, spend 10% on fun, and save 10% - 20%.
2. Of the 10% - 20% I recommend you at least save, I’d suggest you consider doing the following, and in the following order:
1. Save six months’ worth of your monthly expenses in a cash savings account separate from your day-to-day checking account.
2. Pay down any and all outstanding credit card debt you may have and keep it paid off!
3. If applicable, make sure you are contributing to your employer’s retirement plan the amount or percentage you need to in order to maximize their matching contribution.
3. Once you’ve addressed number two, I’d propose making maximum IRA contributions (probably to a Roth IRA if you can, but it could depend…).
4. Once number two and number three are checked off, I’d propose you utilize your savings in the following ways:

• 1/3 as additional contributions to your employer’s retirement plan.
• 1/3 as contributions to a taxable brokerage account (after all, you may want to be able to access some of your investments penalty-free before your 50s).
• 1/3 as additional principal payments to reduce your school, car, home, or other debt(s).

Sure, there might be a college fund for a little one, a pending basement renovation, or an upcoming anniversary trip that needs some of your savings firepower, but this should at least get you started. It is my hope that you will use my plan as your plan. It is my hope that you will use this plan as your policy as your personal and financial situation progresses, so that one day, you don’t look back and wonder where all of that hard-earned cash went. However, if you want to talk specifics about your situation, I’m happy to. You know where to find me.

 

-Tom

It Happens

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Late last year, my wife and I sat down and discussed some of our financial goals for 2013. Essentially, we agreed to four: to put into our 401(k) plans what was necessary to receive our employers’ maximum matches, to make our annual contributions to our Roth IRAs, to increase our “rainy day fund,” and to lower the amount of principal owed on our mortgage to a specific amount. Well, not to brag, but things were going pretty swimmingly. Well, until it happened…

You see, a couple of months ago, there was this period where our karma, luck, mojo, or whatever you want to call it, was not so good. It started when I had a small medical flare up (don’t worry, I’m all good now) that generated some expenses beyond our insurance coverage. Then, my wife’s car had an unexpected electrical problem. Shortly thereafter, we would find out my car needed major repairs to ensure my ability to steer, our digital camera would break, and my computer would make it known that its days were numbered. A week or two of better luck then mercifully came, but only to be vanquished by our garbage disposal giving up the ghost. Then, there was our dachshund Lucy’s annual checkup that yielded some dog toothpaste so expensive that I’m considering trying it out on my own pearly whites! I know in the larger scheme of things that these are “first world problems,” and I still have a lot to be thankful for, but sheesh! Enough is enough already! Uncle! Make it stop!

I don’t share my rotten luck with you to ask for sympathy or to make you feel sorry for my wife and me. You shouldn’t. Everybody has stuff happen to them, and everyone has unforeseen expenses that rear their ugly heads out of nowhere. I share all of this with you to let you know that it will be okay and to remind you that if you have an adequately established emergency fund, you can often be okay relatively quickly. My medical bills are now paid, our car maintenance is complete, we have a new digital camera, we have a much better garbage disposal, and Lucy’s toothpaste seems to be helping her. I still haven’t replaced my dying computer, but knock on wood, we’ll get there.

My wife and I have been able to overcome most of our unexpected expenses because we had an emergency fund in place. We addressed the medical bills and urgent car problems with that emergency fund, but we handled the other, less “mission critical” inconveniences over a period of time after we had more paychecks roll in and recharged our emergency fund. We also tightened our belts on our discretionary spending just a tad. Most of our ambitious 2013 financial goals are still achievable, but after those expenses, I’m no longer certain we can both increase our “rainy day fund” and lower our mortgage principal to the extent we had hoped without altering our desired lifestyle, but that won’t stop us from trying! I just know that after being reminded of how fast large, unexpected expenses can pile up, increasing our “rainy day fund” will be the priority.

I may have a pretty strong financial background, but I don’t have all the answers. I’m just like you, and not immune to the financial strains that come up in life. As Sugarland so perfectly puts it in their popular song It Happens:

Ain't no rhyme or reason
No complicated meaning
Ain't no need to overthink it
Let go laughing
Life don't go quite like you planned it
We try so hard to understand it
The irrefutable, indisputable fact is
It happens

-Tom

P.S. I kid you not that BOTH of our air conditioning units quit working within 48 hours of my original draft of this post! Argh! It happens.

Per Stirpes or Bust

Credit: Grant Cochrane

Do you have a will that leaves things to friends and family you care about? Do you think there is a pretty good chance you might inherit some money from someone who is still alive? If you answered yes to either or both questions, listen up!

Say you have a will and you wish to leave your fortune to your three sons: Alvin, Simon, and Theodore. Say Alvin, Simon, and Theodore have all grown up, and each has a son of his own. Well, if you wrote your will to state that the remainder of your estate was to be divided up equally between Alvin, Simon, and Theodore, what would happen if Alvin died before you had a chance to update your will? If you had the Latin legal phrase known as “per stirpes” included in your wishes (which means “by root or representation”), then Alvin’s son would inherit Alvin’s portion, and Simon and Theodore would inherit their portions. If you do not have per stirpes written, and instead have the phrase “per capita” included in your wishes, then Alvin’s son would get nothing, and Simon and Theodore would split your estate 50/50. Talk about a family feud! If you don’t have “per stirpes” or “per capita” included in your wishes, and Alvin died before you, I honestly couldn’t tell you how your will would pay out without carefully reading the entire document.

I’m not writing this today to scare you to death so we can see how your estate plan shakes out. I’m writing this to encourage you to dust off your latest will and make sure it actually reflects your last wishes, whether per stirpes or per capita. If you think you might inherit some money from someone who is still alive, I encourage you to figure out a way to share this post or drop some sort of hint to make sure your heirs are looked after should something happen to you before your likely grantor.

Finally, please make sure your retirement accounts (401(k)s, IRAs, deferred compensation plans, etc.) and life insurance policies’ beneficiary designations also reflect the last wishes of your will. This is imperative because retirement accounts and life insurance policies' beneficiary designations trump a will. For example, if your 401(k) beneficiary designation says Alvin, Theodore, and Simon per capita, and your will says everything to Alvin, Theodore, and Simon per stirpes, your 401(k) will actually be split per capita! Remember, that would mean your grandson (Alvin’s son) would not see a dime from your 401(k) should Alvin predecease you!

Most of the clients I work with seem to want “per stirpes” to be in place, but that is neither right nor wrong. If you want to ensure that only the people you have specifically named will be able to initially receive your assets, it’s perfectly fine to have “per capita” in place. I just want to encourage you to take a look at your will and beneficiary designations if you are not sure what you have in place because relying on the defaults could lead to your final wishes being skewed and some pretty unhappy chipmunks.

-Tom

You Graduated from College, Now What?

Dummm ... da da dum daaa dummm .... dummm ... da da da dummm… Sorry, Sir Edward Elgar’s Pomp and Circumstance regrettably came to my mind as I started drafting this post.

Either way, today we begin our “Now What?" series, but I need to mention something before we get started. This series is only being broken down into five stereotypical (almost Utopian) life stages as a way for us to outline a suggested financial plan for a lifetime in bite-sized chunks. For example, this post is not just for college graduates; this post is primarily for young people, ranging from high school graduates to people who are relatively new in the workforce, but it can be a good refresher for everyone. Now that we’ve hopefully got that cleared up, let’s go back to that car ride home with the family after college graduation…

Go ahead and enjoy that celebratory lunch, take a few days off, and savor all the cards (and checks) you will probably get in the mail. Graduating from college is a huge accomplishment, but I need to burst your bubble with one of the lessons that hit me hardest right out of school: You have a lot left to learn. I had a master’s degree, I graduated with honors (lowest honors, but still honors!), and I had even passed portions of the CPA Exam, but I quickly realized I had a lot left to learn. I remember sitting at my desk at my first, real, full-time job realizing I had an impressive college pedigree, but somehow at the same time, I knew “diddly-squat.” The real world doesn’t let you go out on Thursday nights, take naps between meetings, or care about your GPA. The real world plays by a different set of rules, and your finances need to adjust accordingly. Here are some suggestions:

• Do something. Whether you’ve graduated recently, have decided to try to change jobs, or have been forced to change jobs in recent years, you know how tough the job market has been. This is why I say “Do something” as opposed to “Get a job.” Doing something includes interviewing for a job like you’ve always wanted, going after a job that’s close to what you’ve always wanted or that could help you springboard into the job you’ve always wanted, getting an internship in the field you want to eventually work in, and even volunteering in any capacity you can find in your area of interest. If you exhaust all those opportunities, maybe consider going back to school to further your training or taking a different type of job. I believe many members of older generations would agree to some degree with the statement I’m about to make: A job is a job. Do something; don’t sit and wait on life, or it will pass you by.
• Start saving. The Bank of Mom and Dad is about to close if it hasn’t already, but don’t fret, this is a once-in-a-lifetime opportunity. You can start living within your means now and likely avoid many of the financial problems that plague others. By that, I mean if you start earning a salary and immediately start saving 10% of it, donating or tithing 10% of it (if you choose to), and investing 10% of it, you will not feel like you are sacrificing anything. That 70% of your remaining salary (100% - 10% saving, 10% donating, and 10% investing) should be relatively easy to live off of as it is probably more money than you have ever earned anyway! When you get that next raise or bonus, keep the same percentages and you won’t even notice you’re saving, donating, and investing more; you’ll just feel like you’re earning more. My theoretical percentages aside, I’d try to save up at least $10,000 cash in a rainy day fund right off the bat.
• Start investing. As I alluded to above, start investing. Many financial planners and wealth advisors have different theories on what you should do, but my personal recommendation would be to start maximizing Roth IRA contributions ($5,000 per year) and setting your contributions to your employer’s 401(k) or retirement plan to at least whatever it takes to get the maximum match amount. Remember that it’s important to invest sooner rather than later as $1,000 invested at age 18 averaging a 5% return per year would equal $6,081 at age 55, whereas, $1,000 invested at age 25 with the same average return per year would only equal $4,322 at age 55. The longer your investments can compound and grow, the sooner you can retire in style!
• Fight off debt. If you have student loans, now is the time to lay waste to them. You do not want these hanging over your head any longer than you have to. Don’t nix your savings or investing plan, just try to live a little leaner so you can start making significant progress towards extinguishing your debts. Also, for no reason short of an alien invasion or maybe blowing out your car’s engine should you start carrying credit card debt! Pay it off every month, no excuses. The interest rate is simply not worth it!
• Make a budget. One of the most amazing things I have realized as a financial planner is that no matter how much money you have, you can get in financial trouble pretty quickly if you spend beyond your means. Don’t adopt the approach that you will pay for everything and save what is left. Save some receipts and bills for a few months and figure out what you can save, donate, invest, and put towards debt first and still have enough left to live reasonably. Remember, you’re not in college anymore - large expenditures for Dixie Cups, grass skirts, and 24-packs of corn dogs (they were good) should not be the norm.

Congratulations again on graduating from college. I hope, and believe, these suggestions will help get your adult life jump-started. Don’t get me wrong, the world is still your oyster; you are just going to have to earn it!

-Tom

Zilch?

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It seemed like a normal day. I was simply riding in an elevator. There was the stereotypical older, corporate-looking gentleman who was clearly running late and giving off a slight aroma of coffee grinds and cigarette smoke. The friendly-enough looking lady who had just finished her morning jog, but was completely engrossed in her smartphone, was also present. With these two characters to choose from, who could really blame me for going with the always-safe, silent elevator ride approach? Luckily, as we zoomed upward into the Atlanta skyline, there were some news headlines scrolling across the bottom of a small television in the elevator to save me from my momentary imprisonment. Then I saw a most disturbing headline: "Survey: 49% of Americans not saving for retirement." Say whaaaaat?

As the bell chimed and the doors to the elevator opened, this horrified financial planner raced to a computer. As much as I would like to report to you that the disastrous news in the elevator was fiction, it was not. I quickly found an article on CNNMoney titled "49% of Americans saving zilch for retirement" that seemed to confirm my fears. Not only did the article say 49% of Americans are saving zilch, but it also stated that 56% of people ages 18-34 are currently not contributing to any retirement plan. Worst of all, the article reported that almost 50% of people aren't even planning on contributing to a retirement plan. I cannot reiterate enough that in today's world, YOU CANNOT AFFORD NOT TO BE SAVING FOR RETIREMENT!

Retirement, "schmetirement" you say? Are you willing to bet that you will have a nice pension or can live off of Social Security? You'll start saving for retirement when it gets closer, right? Well that's at least what 49% of our peers are evidently saying! They don't realize that when I tell people they need to save for retirement today, it is not a polite suggestion. If people don’t save for retirement, they may never be able to retire! Simply put: If you ignore reality and do not make the necessary sacrifices to save for retirement now, you will most likely die working, because you will have to.

It's because of these strong feelings and convictions that I want to share with you a high-level view of the short-term and long-term plans you need to follow in order to secure your financial future, and your retirement chair at the beach.

Short-Term Retirement Plan:

• Start building up your savings- $25 a month, $100 a month, $500 a month… It doesn’t matter how much at first; it matters that you are starting a habit. Work towards a cash reserve of 6 months’ worth of expenses.
• Pay off your credit cards- Make all the minimum payments on all your debts you have to in order to avoid late fees and protect your credit score, but also start hacking away at any credit card debt you may have. Once you pay off all your credit cards, make sure you keep them paid off every month.
• Start saving for retirement- Start contributing to your employer’s retirement-savings plan. Put in what you can afford, but make sure you are taking full advantage of any company matching. If your employer doesn’t have a plan, open your own IRA with a wealth management firm or someone like TD Ameritrade or Fidelity.

Long-Term Retirement Plan:

• Keep on saving- Replenish that 6-month cash reserve after your emergency dental surgery or car problem. Work towards 12 months’ worth of expenses.
• Pay off debt- Look up all the interest rates on all of your student loans, car payments, house payments, home equity lines of credit, etc. Order them from highest to lowest. Make regular payments on all of your debts, but direct all of your excess cash flow at the debt with the highest interest rate. Once that debt is gone, move on to the next highest. Being debt-free lowers your living expenses and gives you a sense of security.
• Keep saving for retirement- Prudently increase your contributions to your employer’s retirement plan. Start contributing to an IRA if you haven’t already. Think two words: nest egg.
• Make sure you have adequate insurance- You need to have a back-up plan in case you get hit by a falling refrigerator or lose a fight with a wood chipper. See what disability benefits you have with your employer, but go ahead and ask your car insurance/homeowners insurance provider(s) about life insurance and disability insurance. You especially need to consider these unlikely and unpleasant scenarios if other family members are depending on your wages.

Please plan for retirement so you're not part of the 49%, I beg of you. Follow the short-term and long-term principles I outlined above, and I can almost promise that one day you will be well on your way to a comfortable retirement.

Finally, friends don't let friends not save for retirement. Please pass these principles on to people you know who need them.

Well I’ve got to run. After that elevator ride, I think I'll take the stairs! 

-Tom

Roth vs. Traditional

Credit: Ambro

In the red corner we have the challenger: a never-tax-deductible, special type of retirement plan whose earnings are tax-exempt. Weighing in as a heavyweight retirement planning tool at age 15 (created in 1997), formerly sponsored by the late Senator William Roth of Delaware, please welcome the Roth IRA.

In the blue corner we have the old champ: a possibly-tax-deductible, retirement plan whose contributions and earnings are tax-deferred. Weighing in as a heavyweight retirement planning tool at age 38 (created in 1974), made famous as part of the Employee Retirement Income Security Act (ERISA), please welcome the Traditional IRA.

I apologize if you don't care for my boxing commentary, but I wanted to be sure to make a point about how financially significant the choice between a Roth IRA and a Traditional IRA can be for an individual. There are other types of IRAs, but these two are by far the most common. I’ve briefly summarized the differences and glossed over the technicalities between a Roth IRA and a Traditional IRA and a Roth 401(k) and a Traditional 401(k) in previous blog posts, but the time has come for us to hammer this out. By the end of this post, it’s my goal that you will be able to make an informed decision about which type of IRA will better suit your personal preferences and cash flow needs, without wanting to throw in the towel. Here goes:

(Bell sounds)

• Roth IRA starts the round by offering that you may contribute the smaller amount of $5,000 a year ($6,000 if you are 50 years of age or older by the end of 2012) or 100% of your 2012 taxable compensation (if your compensation is less than $5,000) to a Roth IRA.
• Traditional IRA parrys with the exact same offering that you may also contribute the smaller amount of $5,000 a year ($6,000 if you are 50 years of age or older by the end of 2012) or 100% of your 2012 taxable compensation (if your compensation is less than $5,000).

• Roth IRA submits that your contributions are not tax deductible, but counters that your contributions and any investment earnings will not be taxed when you withdraw your funds.
• Traditional IRA lands a jab since your contributions may be deductible if your Modified Adjusted Gross Income is less than $58,000 if you file your taxes as an individual or less than $92,000 if you file as married filing jointly.
• Traditional IRA was gloating a little when it was almost knocked down after having to acknowledge that whether you are eligible for a deduction or not, your contributions and any investment earnings will be taxed when you withdraw your funds.

• Roth IRA continues the assault by pointing out that you never have to take mandatory distributions, and if you so choose, you will be able to make tax-free withdrawals after you turn 59 ½.
•  I think it's important to add that you’re actually allowed to withdraw “contribution dollars” (what you have put in, not earnings) at any point after you have held the Roth IRA for at least five years.
• Traditional IRA may be on the ropes here, because if you contribute to a Traditional IRA, you will have to start taking required minimum distributions by age 70 ½, but at least you will be able to make penalty-free withdrawals after you turn 59 ½. 
• Just to be fair, I should also add that any withdrawals you make before 59 ½ (including “contribution dollars”) are subject to tax and a 10% penalty, unless a few, certain exceptions apply.

• Just when you think Roth IRA has this fight won, you learn that you are not allowed to contribute to a Roth IRA if your Modified Adjusted Gross Income is greater than $125,000 if you file your taxes as an individual or greater than $183,000 if you file as married filing jointly.
• Please note there is an income phase out.
• Traditional IRA has landed quite a hook by proving that there is no income limit on being able to make a contribution.

• As the fight draws to a close, Roth IRA gets in one last cross as it reminds us you can contribute at any age.
• Traditional IRA heads to the corner knowing you are not allowed to contribute to a Traditional IRA after you reach the age of 70 ½.

(Bell sounds)

That's it! The fight is over.

I wish I could tell you the absolute winner, but unfortunately I can't always do that without knowing your particular financial situation. If you're still not sure who should have the lead on your scorecard, just remember: Roth contributions are not tax deductible, and the withdrawals are tax free; Traditional contributions could be tax deductible, and the withdrawals are taxable.

Before I sign off, let me briefly mention 401(k)s. You might recall from my previous post, “401-OK,” that some companies are allowing employees to choose between making Roth, or after-tax 401(k) contributions, and Traditional, or pre-tax 401(k) contributions. Well, the takeaways from above are about the same for 401(k)s. Just remember, Roth 401(k) contributions are made with after-tax money and the withdrawals are tax free; Traditional 401(k) contributions are made with pre-tax money, come with no possible deductions (unlike a Traditional IRA), and the withdrawals are taxable. You also might find this Charles Schwab 401(k) Calculator comparison useful in determining the best choice for your particular financial situation.

I know this was one of my more technical posts, and as always, I’m happy to help if you have questions. Try to look on the bright side; at least this Roth vs. Traditional bout was not Pay Per View.

-Tom

"The Bear Necessities"

Credit: Michael Elliott

I was talking to one of the good people who read my blog and he asked me to do a post on the nuts and bolts of managing your money. He wanted me to take a step back and offer the most basic, general suggestions I could on how to best manage your money. What should you do and in what order? Well, your wish is my command! If we could completely start over from the very beginning, here is how I would manage my finances and yours, too:

1. Start a new checkbook where your current balance is exactly what the bank says it is. This time it’s going to be different. Keep up with it. Write neatly. This way you know how much you have and you are protecting yourself from additional expenses, duplicate expenses, and identity theft. If you absolutely refuse to keep a checkbook, at least carefully review your monthly bank statements. If after a few months of keeping good records you notice your bank account is going down, spend less!

2. Once your bank account is actually growing, start an emergency fund or make sure your rainy day fund is adequate. Remember that you’re looking to save up at least 3 to 6 months’ worth of expenses in a checking or savings account. Work towards 6 months’ worth if you can. Go back and take a look at my post “Check Engine Now!” for more details.

3. Now that you’ve started making money and have saved up a safety net, let’s get fancy. Make whatever 401(k) withholding election you need to with your employer to get their maximum match. If they don’t have a match amount, I’d recommend withholding 3%. Make simple, diversified investment choices. Go back and take a look at my “401-OK” post for more details. If your employer doesn’t offer a 401(k), don’t worry, just keep reading.

4. Pay off all outstanding credit card balances. Chances are the interest rate is pretty high, and you always want to have the best credit score you can possibly have. Feel free to keep using credit cards as long as you can pay them off entirely each month. If when you make your monthly credit card payments your bank account starts steadily going down compared to the previous months' balance, spend less! If your credit card balance is more than you can currently pay off, try to minimize your expenses so you can pay a little extra each month, working towards that coveted zero balance.

5. Life insurance, while not that simple on the surface, is something you should actually consider on your money management short list. Particularly if you have a family or kids, make sure you have a policy in place that will provide enough cash to cover your final expenses, pay off all your debts, and allow your family to continue their current lifestyle for at least 6 months to a year. If you are fairly young, reasonably healthy, and especially if you’re female (you usually outlive us males), a policy won’t be that much annually. The security it will provide you and your loved ones is well worth it!

6. Roth IRAs are one of the best things ever. They are wonderful because they provide you with a retirement investment vehicle that can grow over time, tax free. The only catches are that you are limited to contributing $5,000 a year ($6,000 if you are over 50), and you can’t withdraw the earnings on your contributions before you are 59 ½ without potentially facing penalties. (There is also a Roth IRA income threshold of  $173,000 if you file your taxes married filing jointly, but you can always contribute to a traditional IRA.) Setting up an IRA is fairly easy, and it is one of the best retirement planning tools out there. Even if you can’t put in the full $5,000 every year, every little bit will help.

7. If you have followed all of these steps and still have some cash flow left over, it’s time to start eating away at those large debts. Any additional principal you can put down on car loans, student loans, home loans, wedding loans, or any other large loan will help you be debt-free sooner and be charged less interest in the process. Be sure to start with whichever debt has the highest interest rate. Your additional payments may feel like you are spitting into the ocean, but over time, those extra payments will make a difference.

7. For those of you who were excited I made a typo, I regret to inform you that opening an additional investment account is currently tied with paying off your loans in my suggestion book. Over the long run, your investments will offer a higher rate of return than your loans will charge you interest, but with markets the way they are right now, I will leave the choice between loan repayment and investing to your personal discretion. If you still have leftover cash, opening an additional investment account is the way to increase your wealth. Depending on your available assets, you should either purchase some simple mutual funds you’re willing to hold long-term or maybe even open a monitored investment account with a brokerage or wealth management firm. Please note: I would never advise a client to make individual stock picks on their own unless their last name is Buffett, and I don't mean Jimmy!

I hope you found this money management roadmap helpful. Although following all of these steps would help almost anyone financially, a different order might be more appropriate depending on your cash flow needs and your point in life. That being said, this list is intended to be a crude hierarchy, so if you find you are faltering with number 4, go back and fix numbers 1-4 before you continue to move to number 5.

-Tom