Before my husband and I started working with our financial adviser at the beginning of 2020, we didn’t have much of a plan for our money. We made sure our bills were paid each month and our credit wasn’t terrible, but beyond that, there was no strategy.
So while we technically had what we needed — food to eat, a house to live in, clothes to wear — we had no Plan B if we lost those things and no strategic plans for achieving our financial goals.
Our breaking point arrived in mid-2019 when we realized “just getting by” was not just unsustainable, but an irresponsible way to live. We decided to work aggressively to pay off our $30,000 in credit card debt so we could put our extra money toward savings.
But once the debt disappeared, we had no idea where to start. That’s when we enlisted Tom Canale, our financial adviser, who came recommended by a colleague.
In our first meeting, Tom asked us all kinds of questions about our financial situation and goals so he could help us determine the best steps to take. And then he shared his approach with us, the formula he recommends for every client.
This three-step equation has drastically shifted how my husband and I view our money, revealing the priorities we need to focus on if we want to be truly “smart” with our money.
The three-step formula has also provided a clear answer to “what’s next” when we aren’t sure which area of our finances needs our attention.
The thing we like most about Tom’s approach is it gives a helpful framework in any financial situation, no matter how much money you make. Here are the three steps we’re following to make decisions about our money.
Step 1: Protect
In 2019, my freelance income started to increase. I was gaining more clients and making more money than I ever had before. Since we’d always skated by, barely making our mortgage some months, I didn’t have a solid perspective on how to live when you make more money than you need. I’ll be the first to admit that my husband, who’s a full-time employee at a software company, and I took our income for granted.
When Tom introduced the idea of creating a buffer, we realized how much we’d been taking our income for granted. What if something happened to one of us and we couldn’t work? How would we pay our bills then? We had no plan for these “what ifs.” Unfortunately, hoping for the best doesn’t guarantee you’ll have what you need in the future.
The premise with the “protect” step is that you have to have money to do something with it. Before you can figure out the best budget for your family or the smartest way to invest in your future, you need a back-up plan.
For us, that plan was investing in disability insurance for my income. My husband, Tim, already has life insurance for me and disability for himself, so taking that extra step to protect my income provided peace of mind if for some reason I wasn’t able to continue writing due to injury or sickness. Now, we know our income is protected, so we can take the next step.
Step 2: Optimize
Tom’s next suggestion for our financial approach: to optimize our cash flow so we can get the most out of the money we make.
The first and most obvious step was to create a budget. Before working with Tom, we’d tried budgeting a couple of times and failed after just a few months. We had never been successful at knowing exactly where each penny of our income was going, primarily because as a freelancer, it felt overwhelming to me to make a plan for unpredictable income.
We solved that problem of uncertainty by living off of Tim’s income and saving whatever I made, since we knew it would likely fluctuate month to month. Fortunately, our monthly needs, like our mortgage, student loans, groceries, and childcare costs, fit within Tim’s income. Some months, we might need to pull from my savings to make it all work, but it felt good to have two separate “bins” for our money.
From that point, we were able to come up with a plan to optimize my income. I decided, after hiring a CPA Tom recommended, to form an LLC and keep my earnings totally separate from Tim’s. This way, I can more easily make my estimated quarterly tax payments, which my CPA is helping me with.
Optimizing the flow of our money was really just a matter of coming up with a plan for where every dollar would “live,” whether in one of our personal accounts or our joint checking account and then deciding what to do with it. Now that we have a clearer grasp of where all our money will end up, we can start thinking about how to grow it.
Step 3: Grow
The final step in Tom’s formula is the one that seems the farthest off for us. Since we’ve been laser-focused on paying down debt and accumulating emergency savings, we haven’t dedicated much energy to thinking about how to actually grow our money.
The goal here is to ensure we have financial security when it’s time to retire, and that we can meet our financial goals — like paying off our student loans and remodeling our house — along the way.
Tom recommended that once we have more of a pad with our savings and our credit card debt is completely paid off, we start investing more aggressively in a 401(k). Tim was recently able to ramp up his monthly 401(k) contribution, which is matched by his employer, but that’s the only step we’re taking at the moment.
I plan to start contributing to a retirement account soon, but the pandemic has thrown a wrench into our “growth” plans. We’re back to more of a “month-to-month” financial situation for the time being, but I’m fortunate not to be too worried. Thanks to our financial adviser’s advice, we have what we need for now and the short-term future. I’m glad we listened.
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