There are four financial planning steps every firefighter should follow and they should be followed in a specific order 99.9% of the time – just like on the fireground.
We should control the front door until we’re ready to make entry.
We should coordinate ventilation with water on the fire.
We should search before we overhaul.
The same is true in our financial lives. Following these 4 steps will establish a strong financial foundation, place you in command of your hard-earned assets, and will help avoid costly mistakes. Here they are…
1. Protect The Downside
This involves two things. The first is saving 3-6 months of your living expenses to establish an emergency fund. This money should be perfectly accessible, preferably in a high interest savings account. Your emergency fund is designed to cover the unexpected life events that are going to happen – without having to sell investments or take on unplanned debt. If it costs $5K per month to be you, it is important to have $15K available for when Murphy’s Law strikes and your air conditioning goes out the same month as your truck’s transmission.
Secondly, you need to have some sort of life insurance in place if there are people who are financially dependent on you. Many firefighters and their spouses have only the $50K of life insurance offered by many employers (which is about enough to bury you). It is no secret we have some of the highest rates of death, injury, and illness of any occupation. Traditional financial planning advice is to have a death benefit of 10-15 times your income, at least until your pension is locked in, kids are through college, mortgage is paid off, and your spouse’s retirement is funded. While there may be certain state and federal benefits if you were to be killed in the line-of-duty, having your own life insurance protection guarantees you can fund everything you’re currently working for no matter what happens to you.
2. Get The Match
If your employer offers any kind of matching contribution, think of it as FREE MONEY – because that’s exactly what it is!
For example, if your employer matches the first $100 you contribute to your 457 Deferred Compensation Plan, that means when you contribute $100, they contribute $100 on your behalf.
You may also see your employer’s match expressed as a percentage. If you contribute 4%, they contribute 4%.
That’s an instant 100% return on your money before it is even invested! Don’t leave money on the table. Before moving on to Step 3, you should contribute the exact amount required to get the full match in your 457, Health Savings Account, or any similar benefit.
3. Pay Off High Interest Debt
Now it’s time to kill off high interest debt. Begin by listing any debt you have from the highest interest rate to the lowest interest rate. Here’s an example:
Credit card #1 – 24%
Credit card #2- 18%
High interest vehicle loan – 11%
Student loan – 4%
Mortgage – 3%
The average long-term return of the stock market is 10% and that return is earned by taking on volatility over time. Paying off high interest debt at or above that amount gives you a guaranteed rate of return of whatever interest rate you were paying without subjecting your money to volatility – it’s a pretty sweet deal.
Pay the minimum payments on everything, except the debt at the top of your list with the highest interest rate. Throw every spare dollar you have at it. After you’ve paid off the first loan, take the full payment amount from the first loan and send it to the second one until all high interest debt is gone.
You may have heard of good debt versus bad debt. Good debt is borrowed money that may help increase your net worth or help generate future income. Bad debt is borrowed money for consumption purposes or to purchase a rapidly depreciating asset. Many firefighters are locked-in to historically low mortgage rates or have dirt-cheap rates on student loans (which may be forgiven through Public Service Loan Forgiveness) – both are largely considered to be good debts. For most people, it is important to have Step 4 handled before considering paying off these low interest loans.
4. Save and Invest 15-20% of Your Gross Income
This is the concept of paying yourself first. Now that you’re prepared for Murphy’s Law, received all the free money from your employer, and killed off all high interest debt, it’s time for the fun part of saving and investing!
If you earn $80K per year, you should set up your life so you automatically save $12-$16K (15-20% of your income) and then build your lifestyle with everything that remains. This is set-it-and-forget-it status.
If your family earns $150K per year, you should save $23K-$30K per year, and so forth…
Here are some of the ways you can save:
- Fund Roth IRAs
- Contribute to a brokerage account
- Buy rental real estate
- Start a small business
- Save additional money in your 457
Even if you can’t save 15-20% of your income now, the important thing is to set an attainable goal and start working towards it. Write it down. Talk to someone.
What are some opportunities to increase your income? Where are some places you can decrease expenses? How can you be more intentional with your money?
While pensions present a unique planning opportunity, quality of life in retirement will vary dramatically based on the things you put in place today. If you’re working at age 65, it should be because you love the job – not because you have to work. Don’t wait to have confidence and clarity in your financial plan. Get started on these 4 Financial Planning Steps Every Firefighter Should Follow today.
Chris Bauchle is a career firefighter with the Indianapolis (IN) Fire Department. He is a CERTIFIED FINANCIAL PLANNER™, holds a Master’s degree in Finance, and has served well over 100 firefighter families as a financial advisor.
More educational content can be found at firefighterfinancialadvisor.com, where you can subscribe to his quarterly newsletter and be notified of future Firefighter Nation articles.
