Bradley Valentin 
Much of our content at Freedom Finances is geared toward those looking to build their financial literacy and freedom. However, many may feel they have surpassed the basic steps of creating a budget or a starter plan to financial wellness. This plan is for those who feel they are ready for the next step.
Preliminary Steps – Make Sure You’re Ready for the Journey
Before you start making big jumps with your budget and investing, check off a few preliminary steps first:
- Do you have a budget?
- Is your debt under control?
- Does your income accommodate your lifestyle? (If not, make adjustments to your budget first).
If you feel you need to take a step back, that’s okay. Use our beginner plan for building financial wellness first.
Step 1 – Prioritize Investments
After you’ve made sure that you are ready to move forward with your plan, it’s time to prioritize your investment strategy. Beginning with your 401(k) is a great start, as many companies have an employee match, which means your investment is immediately doubled. It’s hard to beat 100% returns these days.
A few more basic steps include the following:
- Avoid overspending on credit cards and cars, as they slow your ability to invest
- Take advantage of your employer benefits
- Avoid timing the market and meme stocks
You can find more information on Five Responsible Ways to Build Wealth here.
Step 2 – Understand Your Risk Level
Many financial planners will begin with this step before they make recommendations for you. Low-risk investment strategies mean that you are willing to invest in low-risk investments while receiving smaller returns. A low-risk investment plan means that you do not really need a financial advisor. In fact, if your risk level is too small, some financial advisors will not take you as a client.
Evaluate your risk level with your family, and find what’s right for you. The general consensus is that the closer you are to retirement, the lower the risk you should take on. The younger you are, the more room you have to build a riskier profile.
Step 3 – Evaluate Your Available Funds
What portion of your budget is available for investments? You should know this, and you should know how much you are willing to invest in the long-term.
Let’s build a hypothetical to help understand.
- You have $25,000 in savings in the bank
- You contribute $500/month to your 401(k) and are meeting your company’s match
- An extra $500/month is going to your savings account
- You invest $150 into an ETF monthly
In this scenario, we have $25,000 available to invest right now, with an extra $650 available to add to other investments. You will need to keep some money liquid in case of an emergency first, so investing all $25,000 would not be smart. First, evaluate your emergency fund and see how much of your $25,000 you want to keep in the bank. Let’s say you want to keep all but $5,000; you can use that additional $5,000 to start building an investment portfolio. You can then fund your investment portfolio with the extra $650/month you have available to save.
Ongoing Step – Build Financial Literacy
Do you know what a beta is? Beta refers to the measurement of risk a stock has within the stock market. (You can find our Financial Dictionary here). As you are building your financial plan for the future, make sure you give yourself time to build financial literacy. You can find many great sources at Freedom Finances, including our Financial Literacy section, which is meant just for this step. The more you continue to learn, the wiser you will become in this journey, making better judgment calls with your financial investments.
Step 4 – Build in Some Risk Reduction
While you have already evaluated your risk level, take this time to build in some risk reduction for yourself. You can always find low-risk investments like bonds, CDs, and T-Bills, which are company or government investments that often have nearly guaranteed (though smaller) returns. You can make these investments yourself through platforms like Charles Schwab, Vanguard, Robinhood, or Fidelity.
If you build in a low-risk portion of your investment portfolio, you can give yourself some ease while allowing your longer, higher-risk investments time to grow. CDs are a great starting point, and you can pick your risk-level and maturity dates of your CDs. Most CDs come in options of 3, 6, 9, or 12 months. This makes CDs a great option for low-risk, high-liquid investments in many portfolios.
*Note, if you are simply looking to make money in the short, but not interested in long-term investments, CDs and bonds are the best options for guaranteed income.
Step 5 – Build Timelines & Evaluate Your Involvement
Investing in CDs and bonds, as discussed above, are great short-term options. Now, it’s time to look at your timelines for investments. Do you want to build a timeline where you set your investments, and leave it alone until retirement? Or do you want to continue making adjustments until you withdraw all of your investments?
Regardless of your answer here, there should be some funds that you set and forget. Growth stocks take time to accumulate value, while dividend stocks take time to accumulate compound interest.
Step 6 – Build Diversity
This is another step that helps reduce risk, but it also creates more potential value for you in the future. Outside of risk reduction, having a diverse portfolio helps you maximize your gains while you learn which investments are best for you. While a portfolio of 100% Tesla stocks will likely grow over the next few years, there’s no guarnatee that your gamble will pay off in the long-run, and you reduce you ability to increase gains in different ways.
Building diversity into your portoflio could include the following: foreign stocks, bonds, real estate, growth stocks, dividend stocks, ETFs, mutual funds, and cryptocurrency. Some recommend that you leave the investments upto the proffesionals and simply invest in ETFs and mutual funds. These are diverse funds that have been built by stock professionals and are managed to increase your earnings. While not perfect, ETFs and Mutual Funds are great options for those looking for diversity with little effort on their own.
Step 7 – Learn From Your Mistakes/Reevaluate
Throughout your journey, you’re likely to make mistakes or have lifestyle adjustments. When this happens, do not abandon your plan; instead, make an adjustment and move forward. Some things to consider during your journey that call for adjustments:
- Job changes – promotions or layoffs
- Major life changes – marriage, building families, divorce, college funds, etc.
- Changes in your debt – Build a plan to reduce your long-term debt like your mortgage
- Major losses/gains in your portfolio
Some of these changes in your life require major adjustments like a layoff, marriage, or pregnancy. Make sure to plan with your family, and reevaluate your budget when these life changes happen.
However, gains or losses in your portfolio should be evaluated with caution and patience. If you have a particular fund or investment that has had a strong year, this does not mean that you should reduce your overall diversity. Instead of selling off other investments and reinvesting them back into the most successful ones, build a plan to put aside extra funds towards your winning investments. You also have the option to sell winning stocks at a high and reinvest them elsewhere, or even simply keep the plan as it is.
Major losses might mean that you want to slow your funding for low-value investments, but it might also mean that you might need to understand your investment better. For example, if you have decided to invest in Coca-Cola (KO), and after a year you lost money, you might need to understand why. KO is not a growth stock and will see long periods with little-to-no gains, or even losses. However, it does offer a dividend, which means you’re making your gains through simply owning the stock, not owning and then selling (capital gains).
Step 8 – Exercise Discipline and Patience
Throughout your process of building wealth, you will get lucky, you will see losses, and you will see periods of stagnation. Don’t make major changes throughout your journey when you need don’t to. Every loss doesn’t mean that you have to reinvest your funds somewhere more secure. Every major gain doesn’t mean that you are set for life. Building wealth takes time, and if someone tells you that you can do it quickly, you’re being lied to (or scammed)!
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