Financial Planning Basics

Study Notes

Baby Steps Overview

Baby Step 1: Save $1,000 for an emergency fund to ensure stability.
Baby Step 2: Begin the "undebtening" process by listing debts from smallest to largest and prioritize paying them off. Sell non-essential items or increase income if necessary.
Mortgages and business loans are excluded from the debt snowball and paid off later.
Debt Snowball Effect: Frees up income and counters the debt lifestyle.

Emergency Fund Insights

Baby Step 3: Transition to a fully funded emergency fund covering 3-6 months of expenses.
Average emergency fund size: $5,000 to $25,000; at least $10,000 recommended for monthly expenses of $3,000.
78% of individuals will face a money emergency within 10 years, emphasizing the need for an emergency fund.
Keep emergency funds in liquid accounts for easy access without penalties.

Investment Strategies

Investment Focus: Invest 15% of gross income into retirement funds after completing Baby Steps 1-3.
Use mutual funds for retirement investments; average returns historically around 12%.
Select diversified funds: Growth and income, growth, international, and aggressive growth, each accounting for 25% of the portfolio.
Roth IRAs are recommended for tax-free growth; investing $3,000/year can yield significant returns by retirement age.

College Funding

Education Savings Accounts (ESA): Fund college with tax-free growth in mutual funds; $2,000/year can translate into substantial savings.
For expensive schools, look into 529 plans which allow for a broader investment choice and flexibility.

Debt Management and Mortgages

Keep mortgage payments below 25% of take-home pay; prefer 15-year fixed-rate loans.
Avoid adjustable-rate and balloon mortgages due to their inherent risks.

Insurance and Credit Considerations

Obtain necessary insurances like auto, homeowner, and term life with high deductibles and sufficient coverage.
Debt reduction over reliance on credit; debit cards are effective for purchasing without accumulating debt.
FICO score is determined by payment history, debt levels, length of debt, new debt, and types of debt.

Final Notes on Wealth Building

Baby Step 7: Focus on building wealth by investing smartly and remaining debt-free.
Overall financial strategy emphasizes simplicity in managing money while progressively building wealth from the ground up.

Description

Test your knowledge on the essential steps of financial planning, including creating an emergency fund, paying off debts, and investing for retirement. This quiz covers the Baby Steps for managing personal finances effectively and ensuring long-term stability.