Pay off debts - and then what? What comes next? What number comes after zero? (Answer: infinite rational numbers). Paying off debt is exactly like clearing clutter or losing weight. We tend to make much faster progress when we realize that these goals are not ends in themselves. They are states of being. They are introductory goals. Paying off debt, like these other minor goals, is a new baseline. It becomes the new normal. What we do when we're planning for Future Self is to imagine that we've already reached the new baseline, and then to choose what our goals will be from that starting point. When we're climbing the stairs, we know what floor we're trying to reach; when we drive, we look up the road more than a few yards. We need to know where we're trying to go if we ever want to get there.
Financial education has three problems. First, what we learn from our parents, relatives, neighbors, and friends may be the opposite of helpful. Second, even if we're taught personal finance in school, we learn it at an age when it doesn't feel relevant. Third, almost all of the financial advice we receive as adults comes from marketing for products that benefit the seller, not necessarily the buyer. Whose advice are we supposed to take? We can choose from a bunch of people who don't know what they're doing, earnest educators who earn a teacher's salary, or predatory professionals who want a piece of our assets. This is why finance is exactly like fitness. It's like trying to sort advice from our fellow fat people, the gym teacher, or manufacturers of snake-oil weight loss pills.
Start with what you want. Not what someone else wants. Not everyone wants or needs to plan to buy a house or start a family. People who live alone with no dependents don't need life insurance. Some people would rather have job security, while others would rather live on the edge and be their own bosses. Some people love school and want advanced education, while others find it irrelevant. Some of us are ambitious and know we'll never be satisfied, because there's always more to learn and more to do, so how can there ever be an end goal?
What if your first problem is just knowing where your grocery money is coming from by the end of the week? Been there, done that, tried to sell the shirt at the consignment shop. Being hungry makes it really hard to concentrate on stuff like retirement planning. It also makes it hard to get through a job interview without your hands shaking. Getting a good job takes confidence that it's really hard to summon up when you're in dire straits. It takes faith that you have the power to work hard, contribute at a higher level, earn more, and get your feet back under you.
Since I've been there, let me share the rungs of the ladder, from flat broke to financially savvy.
1. Stockpiling a few days' worth of food. You have to learn to cook and how to bulk shop. For the cost of a Big Mac, I can make a pot of split pea soup and a loaf of homemade bread that will feed four people. Or I can buy five pounds of potatoes.
2. Building your reputation as a reliable worker. If you show up on time and work hard, people will set you up with opportunities to earn extra money. I was always able to find someone who would pay me ten bucks to clean their bathroom. I babysat, house sat, sewed buttons and did mending, hemmed pants, painted, and at least half a dozen other odd jobs and side hustles throughout my twenties.
3. Educating yourself. Everything I ever learned about finance, I learned from reading library books and personal finance websites. If you want better results than other people have, you have to know more than they do.
4. Getting ahead. First a week ahead, then a paycheck ahead, then a month ahead. This means you put money aside before your bills are due, instead of trying to pay after the statement comes. When I got my first job after I graduated from college, I slept on an air mattress for two months. When I got my first apartment, my living room was empty for two months while I saved for a couch. This is because I put my financial goals before physical comfort, much less entertainment or leisure. I wouldn't call this savings. It's just operational expenses. This money sits in your checking account, where the goal is never to go below the minimum balance.
5. Sock money. Cash that you hide in your house. Never tell anyone where it is, or look at it or touch it while someone can see you. Pretend you don't have it and that it doesn't exist. This is the money you rely on when you're really, really in trouble, for groceries or a cab to get the heck out of there. I have a jar of pennies I found on the street that now has over fifty bucks in it. That's separate from what I keep in my go bag for evacuating from natural disasters.
6. Emergency savings. An emergency savings account will most likely be depleted over and over again. That's why it's there. It's a buffer that keeps you from needing to put surprise expenses on a credit card. (Automotive repair, plane tickets for a funeral, co-pay on a root canal, etc). The only reason to use a credit card is to get reward points, but it's cheaper to buy the "rewards" directly than to carry a balance on a credit card. Emergency savings is not the same thing as retirement savings. Keep it in a regular savings account where you can withdraw it quickly if you need to.
7.Discretionary savings. This is not the same thing as emergency savings, and it's also not counted toward retirement. This is where you save for something like a new vehicle, furniture, orthodontia, or the deposit on a new apartment. Discretionary savings can go in a CD or "holiday and taxes" account that earns a little interest, but makes you wait before you can make withdrawals.
8. Investing. When I started investing for retirement, I had a quarter-time job and I was living in a dorm. It just happened. My job classification was suddenly eligible for retirement contributions. The money came out of my checks before taxes. It was a hard emotional choice, but whenever I would get a new job, I would immediately fill out the HR paperwork and make the maximum contribution eligible for the company match. I would put aside the maximum even if there wasn't a match. Future Self always got her chunk. I was still quite broke for the first five years after I started investing.
9. F.U. Money. "Forget yoU." This is when you have enough financial security that you can exit a dissatisfying situation. Quit a bad job, move away from a cruddy neighborhood, break a lease, leave an unhealthy relationship. If I had had F.U. money in my early 20s, I wouldn't have married my first husband in the first place, much less stayed with him. It's sad to realize that.
10. Planning for financial independence, or FI. Eff Eye. Being financially independent means that you have enough money coming in to afford your lifestyle without a paycheck. It's roughly equivalent to retirement, except that not everyone who "retires" is financially independent, and not everyone who is FI quits working. This can be achieved in several different ways. Most people have a mix, because it's safer and easier to diversify. There might be rents from properties like a rental house or apartment building. There might be dividends or interest from a portfolio of stocks and bonds. There might be passive income from one or more businesses, website ads, etc. There might be royalties from books, music, or recorded performances like TV commercials. There might be income from a family trust. Note that none of these means of earning income are taught in high school personal finance classes. Also, there is no specific amount of money required for financial independence; it depends on where you live and what your expenses are. Some people would rather quit working as soon as possible and live marginally, while others would rather keep going and live abundantly.
Note that I did not include a category for paying off debt. That's because debt is unnecessary - and irrationally expensive. Yes, it's hard to get an advanced education without debt, but it can be done. Yes, it's hard to buy a house without debt, but it can be done, too. For instance, my husband got his BS, and then the company that hired him paid for his Master's. I worked full-time during my freshman year while taking a full course load of 14 credit-hours, and I paid cash for my tuition and books each term. I was on the Dean's List, too. As for housing, more and more people are building tiny houses without a home loan, and there are distressed areas of the US where it's currently still possible to buy a house for one dollar. The debt we're talking about generally means consumer debt, and we like to be defense lawyers for ourselves when it comes to how necessary our credit card expenses really were. Consumer debt means we didn't have enough in our emergency funds and we didn't put away enough in discretionary savings, either.
The fastest, easiest way to reach financial goals is to earn more money. This usually means paying out of pocket and spending nights and weekends to earn credentials for a new career. Sometimes it means working 80-hour weeks for several years to start your own business, which may or may not succeed. Most people either don't realize there's another way, don't have the desire or energy to try any other ways, or simply lack the imagination to see more intriguing possibilities. We do what everyone else does, which is to live out the status quo and then feel extremely surprised and disappointed when we reach our sixties and understand what "retirement" really looks like.
Setting financial goals past the point of "debt free" involves doing unfamiliar things that the majority are not doing. This makes it uncomfortable, confusing, and sometimes scary. It takes faith. It can be like hiking a mountain trail in the dark with just a flashlight, climbing and climbing, twisting and turning, only able to see a few feet ahead of you, but believing that this trail leads somewhere. Then, suddenly, you find yourself at a higher elevation, and the sun rises on a new day with a vantage point you can't believe you're really seeing. With planning and preparation and training and effort, you got there.
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I've been working with chronic disorganization, squalor, and hoarding for over 20 years. I'm also a marathon runner who was diagnosed with fibromyalgia and thyroid disease 17 years ago.