Seven Steps Toward Establishing Financial Stability for You and Your Kids

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Since my man, Damon, got all financial in his comment responding to my post two days ago I've decided to delve into his point a bit more.

Keeping the house in order first and foremost means keeping your own pocket in order. For those of us who have money we can count, the first act in this is self-control. Like mom telling you, "make sure your eyes aren't bigger than your stomach," don't spend more than you have.

Pay down your debt and save, save, save. And then save some more.


1. Build Your Knowledge

Because I make money that I can count I don't believe I should pay a financial planner to manage my very manageable assets. This is a personal choice. But I couldn't live without the wisdom of individuals such as David Bach, author of The Automatic Millionaire and Smart Couples Finish Rich. These two books teach you how to stop wasting your money, get out of debt, and how to set up an automatic money management system (also known as a budget). A couple of other great books that help to clarify the relationship one should have with money are, The Millionaire Next Door and The Richest Man In Babylon. The personal finance editions of Money Magazine and Fortune Magazine are also great resources that provide monthly up-to-date information on becoming a more financially secure you.


2. Get Life Insurance

As Damon also suggested, get life insurance. You may think you are wasting your money on something you can't see (especially us people of color - I learned this the hard way during a brief stint selling life insurance), but drop dead one day and listen to how much your relatives curse you for leaving them with your bills. Seriously though, a life insurance policy (preferably term-life) with an appropriate death benefit can mean your children and your wife will not experience a setback because your income has been removed from the pie. Plus there should also be enough money in it to put you in the ground and pay off your debts (like the mortgage). Visit Bankrate.com for life insurance company rankings and calculators to help you determine how much you need.


3. Set Up a Rainy Day Account

A Rainy-Day savings account is invaluable as rainy days occur unexpectedly. I'll never forget the time I ran over a pipe a few years back on the Van Wyck Expressway and shredded two tires and bent one rim. I spent a better part of that afternoon trying to figure out how I was going to make it to the next day since I had unload all the cash in my checking account and use a credit card to get towed and buy new tires (I drove on a bent rim for a while). With a Rainy Day account (filled with enough cash to cover 3-6 months worth of expenses) things like this are manageable. It takes a long time to do (I'm not there myself), but it's worth it.


4. Start Saving for College Now

Find out if there's a 529 Plan (preferably a Direct Plan to avoid paying commissions) in your state. You have to contribute to it after-taxes, but the interest grows tax-free and you can withdraw it tax-free as long as the money is used toward qualifying educational purposes. In other words, your child's college tuition. If you Google 529 Plans or visit Bankrate they can give you all the specifics regarding contributions, setup, etc. Note: No matter how old your kid is, this has a future payout/payoff. Do your best to ignore the ups and downs of the current market (the technical terminology for this is tolerating the market). If you can't, then you have low tolerance (not a bad thing), if you can, then you have high tolerance (not a bad thing either). Like 401ks, 529 Plans provide a diverse array of investment options.


5. Build Your Nest Egg

If you have a retirement plan where you work (401k, 403b, etc) you should be putting at least 10% of your gross pay into it every paycheck. If 10% is too high a number to swallow then start off at 5% and then ease up to 10% and if you're brave try to contribute the maximum. The more you save, the more you'll save in taxes. But if you don't save, then you're working for free. Meaning, if all you do is pay your bills (other people) and buy stuff (depreciating assets: cars, clothes, etc. made by other people) that won't be worth anything once they go out of style or become obsolete and you save nothing for yourself then all you've done is work to give other people your money --- you're working for free. In my humble opinion there is nothing is more tragic than watching someone in their golden years struggling to make ends meet because they don't have a nest egg (for this part, you may actually need a financial planner, or a good financially sound friend you trust to advise you).


6. Get A Will

You can't take it with you. As Damon indicated we're not going to live forever no matter how invulnerable some of us (me, especially) might feel from one day to the next. Getting your house in order on paper for the day that you're not around to keep order is a step that shouldn't be taken lightly. A will takes the guesswork out of your estate and will keep your family from killing each other over what you've left behind.


7. Discipline, Discipline, Discipline

Steps one through five don't matter if you don't put them into practice and keep practicing them, day in and day out. Allow yourself to make mistakes, otherwise you'll never stick to it, but don't get lackadaisical. Remember, your financial stability (and that of your kids) is on the line. Isn't that worth giving it your best shot?

If you follow these seven steps in time you'll be able to add more steps, manage more money, exercise more control over your life, stress a whole lot less about the unknown, and know that barring the end of the world, the kids will be taken care of.

Now the real key to making this work is getting your spouse/partner on board to work on all this with you.