Financial Planning Steps for 2009

Do you want to secure and sound financial future and reach all of your future goals? Here are the four steps:

1) Cash Reserves - The MOST IMPORTANT step is to accumulate some savings. The over 2 million Americans who lost their jobs in the past year that will be able to make it without perhaps filing bankruptcy are the ones who have the safety net of a cash reserve account. You never know when something might happen and your income will disappear, whether it is a job loss or disability. Also, you never know when you may have an unexpected purchase or expense such as auto repairs, unexpected medical bills not covered by insurance, or when you may need to help an elderly parent. Ideally, you want six months salary socked away somewhere safe and accessible. However, any amount is better than nothing.

2) Pay off Non-Preferred Debt - Non-preferred debt is any debt that is not tax-deductible or carries a high interest rate. Credit cards sap the life out of a financial plan. Pay your cards off each month and use them in the event of an emergency and to help your credit scores. When you pay your cards off, be sure to keep them open with as high of a credit limit as possible, and use them sparingly (one small purchase per month) for maximum points on your credit report.

3) Save and Pay Cash For Purchases - Try to get to the point where you are paying cash for Christmas, birthdays, vacations, and if possible, automobiles. Also, put away as much as possible for retirement, especially if your company matches your 401k contributions. This, of course, requires you to live within your means.

4) Pay off Your Mortgage - Once you have accomplished the above goals, focus on reaching your mortgage freedom point. This is the point in time where your mortgage is paid in full OR you have enough liquid savings set aside to pay it off if you choose. I personally prefer the second alternative since it allows consumers to keep control of their funds through liquidity, preserves tax benefits, and allows you to earn a rate of return.

Note: Imagine the thousands of Americans who have focused on pre-paying their mortgage or getting a 15 year mortgage over the past few years. Many of these consumers believed they were doing the right thing by sending in extra funds to their lender. Well, when some of these Americans lost their job, the bank still wanted their monthly payments. Since some of these well-meaning, proactive, and responsible consumers skipped steps 1, 2, and 3 and went straight to step 4, they lost their homes or are facing foreclosure in the very near future.
Remember these four steps: cash savings/no credit cards/live within your means by paying cash/reach your mortgage freedom point and you will have peace of mind and a very bright financial future.