Getting Started on Your Path to Financial Freedom

Step 1:  Setup a Budget

No matter your level of income, if you spend more than you make, you will never accumulate wealth.  To get a clear picture of what comes in and what goes out, you need to develop a household budget.  Mint.com provides free tools to help you get a handle on your cash flow situation.  Once your budget is in place, spending will need to be adjusted to allow you to generate excess cash.

Step 2:  Build an Emergency Cash Reserve

From the extra money you have found in Step 1, you will begin to build your emergency cash reserve.  This account will be used for rare emergencies, such as repairing a broken refrigerator or dealing with an unexpected medical condition.  The recommended amount of emergency cash you should have available is around six to nine months of fixed expenses.  ING DIRECT USA makes saving money simple! Open your account online today. No fees and no minimums!

Step 3:  Eliminate Bad Debt

Once your emergency reserve is funded, you will begin eliminating all traces of bad debt.  For simplicities sake, we will consider all debt bad debt, except for a home mortgage and student loans.  The plan is simple:  after covering all minimum required payments, use all remaining excess cash to pay down debt starting with the highest interest debt.  Once this debt is eliminated, commit excess cash to the next highest interest debt, and repeat this process until all bad debt is gone.

Step 4:  Begin Your Investment Program

Now that you have eliminated all bad debt, you are free to use your excess cash to start your investment program.  The money generated by this program will be used in the future to help fund your retirement.  To begin this process, you will need to answer two questions:

• Question 1:  What type of account should I use (i.e. 401k, Roth IRA, etc.)?
• Question 2:  When do I plan on retiring?

To help you answer Question 1, the Motley Fool website, www.fool.com, provides an excellent discussion of the topic here.  For most people, the answer to Question 2 will be somewhere between 60 and 70 years old.  Once these questions are answered, you are ready to move to the next step of selecting a target retirement fund.

But first, what is a target retirement fund?  It is simply a diversified investment of stocks and bonds in a single fund which automatically adjusts the stock/bond mix to a more conservative position as retirement approaches.  In a nutshell, these funds are simple, effective, and cheap.  The perfect solution!

If your answer to Question 1 is anything but an employer plan, you can go directly to the Vanguard website to open an account and select the target retirement fund that corresponds to your retirement age.  Click here to begin.  After clicking on the appropriate fund, scroll down to hit the "Invest Now" button begin the account opening process.

If you will be using an employer plan and do not have target retirement funds among your investment options, you can still use the Vanguard website to assist you with your decision.  First, go through the process of selecting a target retirement fund just as above.  Click here to begin.  After clicking on the appropriate fund, click on the "Holdings and Management" tab to see the stock/bond breakdown.  Finally, select funds in your company plan according to the stock/bond breakdown you just determined.  Make use of index funds if available.

Pretty simple, right?