Congratulations! You have reached WayPoint 5. Your unsecured debt has been eliminated, your cars are paid for and the only debt remaining is your primary mortgage. WayPoint 5 is called the “Safety zone”. In the Nautical world, Safety Zones prohibit unauthorized entry thereby protecting sailors, mariners and fishermen by reducing the risk of collision, but they also protect the lives and equipment of those working in the safety zone. In the personal finance world, we equate the safe zone to saving 6 months of living expenses. Once you have this account fully funded, you are protected if and when an adverse situation occurs in your life. You are protected in this Safe Zone and will not be subjected to financial stress during a crisis situation. Your safe zone will take care of you during this time. The money you allocated to eliminate your debt will now be allocated to fund your Safe Zone. You should contribute to this fund until you have saved enough to cover six months of living expenses. If you ever face a crisis situation, we highly recommend that you eliminate or reduce all non-essential expenses until the crisis passes and your account is fully funded again.
If you managed to save between $1,000 and $2,500 in your Initial Emergency Fund, congratulations! You have met a major milestone that most people will never attain. With this accomplishment, you are now ready to attack your debt. WayPoint 4 is called the “DebtWave”. In the Nautical world, wave energy can travel across the ocean for thousands of miles. Smaller waves are consumed by larger waves. The larger the wave becomes and the closer it gets to the shore, the greater its power and impact. This concept is also applied to our Financial world. As you pay off your smaller debts, the money that was used for that debt payoff can then be applied to the next smaller debt until that one is also eradicated. As you continue to apply the funds used for smaller debts toward the larger ones, your “DebtWave” will continue to grow until all debts are paid off (Excluding Mortgage Debt). This step is where most momentum is accomplished. When you achieve that first debt payoff, you will receive a deep sense of accomplishment and want to do everything possible to keep the DebtWave moving across all other debts. You will begin to experience the desire to make every effort to minimize your spending, lower your expenses, and live your life focused on the end goal of debt elimination. Every dollar you decide not to use toward discretionary spending (non-essential purchases) can be applied to your DebtWave. Once your debt is eliminated and the only debt expense left is your mortgage, you will feel a sense of peace that very few will ever experience.
You are well on your way to creating a plan that will help you reach your financial destination. Now that you have a zero based budget, it’s time to concentrate on WayPoint 3. We call this WayPoint the “Buffer Zone”. A Buffer Zone in nautical terms means; “An area that is protected from assault and invasion.” When you have an Emergency Fund established, you are protected from having to use credit in case of a crisis event. Depending on your situation, we recommend your Initial Emergency Fund investment be between $1,000 and $2,500. This fund should be set aside but accessible in case of an actual emergency. It should not be used for household purchases, social events, entertainment or purchases that you want. It is to be reserved for those actual unexpected events like a roof repair, car accident, appliance breakdown or other crisis that may occur. Once again, we encourage you to review every purchase and expense and start to minimize or eliminate those expenses that lean toward your “Want Appetite” and not your “Need Requirement”. Once that money is freed up, it will help you build that emergency fund quicker. The goal is to have this account fully funded within 4 to 6 weeks.
Once you are past Mayday Clear and current on all your bills, it’s time to narrow in on developing a zero-based budget. Our second WayPoint is labeled Zero In. This is where you narrow in on your target and create discipline that will lead you toward developing a workable and usable balanced budget. There are only four data points used in budgets: 1. Monthly take home pay; 2. Fixed expenses; 3. Variable expenses; and the one that most don’t factor into their plan that causes the greatest disruption – 4. Periodic expenses. Monthly take home pay is a finite and usually fixed amount. Without a pay raise, a bonus or a change in deductions, this amount is fairly easy to calculate. Fixed expenses are rarely adjustable, so they are easily transferred to a budget worksheet with minimal thought. Variable expenses can either be discretionary or non-discretionary. When developing a zero-based budget, you will want to minimize the discretionary expenses (non-essential purchases) so more cash is available for that particular WayPoint you are working on. Periodic expenses are those expenses that occur only on a periodic bases. Once again, these expenses can be discretionary or non-discretionary. Some typical examples of Periodic expenses are: water/sewage bill, car insurance, gift purchases, vacations, lawn care, etc. To properly prepare a monthly budget, we teach our clients how to pre-plan all the periodic expenses and turn them into a fixed monthly expense. For example, if you plan on taking a vacation in 10 months and your planned vacation expense is $2,500, you will want to set aside $250 a month to cover that future expense. If your water bill comes every three months and let’s say it’s $120, you should set aside $40 a month to cover the expense when it comes due. The key to a zero-based budget is to give every dollar a name and have it allocated to the categories that apply to your specific needs.
As it is with every journey, you must minimize the risk before you set sail. If there is a crisis occurring in your life, we encourage you to deal with the crisis before you develop a plan to do anything else. Your concentration should be on finding a way to eliminate the crisis so you can begin or continue your journey on a healthy financial foot. Our first WayPoint is called “Mayday Clear”. It’s imperative that you are free of crisis before you begin your journey. It is also important to focus your attention on making sure your “Four Pillars” have a firm foundation and are stable. The Four Pillars include: Housing, Food, Transportation, and Utilities. If you are behind or unable to pay for any of these basic necessities, the domino effect could cause disruption or crisis in other areas of your life. For example, if you continue to not pay your auto loan, your car could be repossessed leaving you without transportation to your job. Or, if your utilities are not paid, you risk the chance of the power company turning off your electricity, leaving you and your family in the cold. All your attention needs to focus on maintaining the basic necessities before any other expense or bill is paid. If there is no cash-flow remaining to pay your credit cards, then your creditors will just have to wait. All discretionary spending (Non-essential spending) needs to stop. Your cable, coffees/lattes, eating out, vending, sodas, car washes, entertainment, trips, etc., need to be put on hold until the crisis passes.
We are often asked what a WayPoint is. They are a set of coordinates that are used to chart a course so one can reach their destination in a timely and safe manner. A WayPoint can be a physical object, a location or a reference point. WayPoints Financial Services uses our own set of defined WayPoints to chart out a clients financial journey so they can reach their destination in a timely and unobstructed manner. We chart their course according to their short term and long term goals. We carefully analyze their income, debts, expenses, assets, investments, deductions and lifestyle needs and determine the best course of action they should take in order to reach their destination in the timeframe they have envisioned. Our Goal Planning System (GPS) along with our experienced staff will give the client the best possible solutions that will bring them financial success. my next 10 blogs will define and explain our 10 WayPoints Navigation Chart that we use to guide our clients on their financial journey.