If you are just starting out on the path to FI, or counselling someone who is just starting out, what is the sequence of steps that you would work on? What would you counsel your colleague to do first, then second, then third, etc?  I’ve read numerous books and articles on the various aspects of getting your financial house in order and moving forward. For the most part, they jump around a great deal, based on the author’s particular interests.

If you had a young adult who came to you for guidance on the subject, what would you have them do first?

My thoughts on the subject, and the order I would approach them would be:

  1. Goals: The first step is to identify where you want to go. This is the opportunity to bump up the motivation, as you get your friend to dream big dreams (and small dreams) and identify where they want to go in the next month, next year, next 5-10 years. Its fuel for the fire.
  2. Paycheck: Get ahold of a copy of the paycheck and work out what you are getting paid for, what withdrawals are being taken out, and what benefits you are getting, or could claim (like a 401K, reduced cost insurance, etc.). This is the basis for everything that follows – you have to have money coming in if you are to budget, pay off debts, invest and increase your net worth.
  3. Expenses: Once you identify what is coming in, you need to work out what is going out (housing, transportation, food, clothing, debt, etc.). Depending on the person’s situation, this could be small (student) or large (adult out in the world for a while).
  4. Budget & Cash Flow: Now that you have your income and expenses, you can work out your cash flow (income – expenses = cash flow). If it’s not positive, then it’s time to do whatever is necessary to get it there (additional job, cut expenses, etc.). Once you understand your cash flow, you can make intelligent decisions on how you want to live your life, and how you can pursue your goals.
  5. New Worth: Some folks would say to move this higher up (maybe #2) to get an idea of where you are, but it think this is a more complicated topic, one that you need to have a little knowledge about finances before you can really delve into it. Here you are going to get a “snapshot” of your current financial situation, and this will help you see how far you are from reaching your goals. T
  6. Debt /debt service ratios: So many people are deeply in debt and feel helpless to pull themselves out. By gaining an understanding of debt, a good debt ratio (never have more than 40% of your income in debt payments) and ways to pay it off as quickly as possible, helps to create a feeling of control on the part of the practitioner.
  7. Power of Compound Interest/Investing: The last part I would I would have them learn would be the power of compound interest, and basic investing, to grow their money faster.

I think these would be a good start, and from there, you could cover other items in depth which will add to the knowledge (emergency funds, taxes, spending on home & cars, insurance, etc.).

So what would be the first 5-7 steps you would counsel someone on?


Mr. 39 Months

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