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How are your finances?
Do you have a financial plan?
Did one or both of those questions freak you out? It’s okay, those two questions used to freak me out, too.
Here’s the good news: Your finances don’t have to make you feel overwhelmed, confused, or hopeless.
It’s actually possible for you to reach your goals (like getting out of debt, reaching financial independence, creating generational wealth) without pulling your hair out (or skimping on lattes). I’m serious!
Just so we’re both on the same page, I’m going to outline 5 (+1) different stages of financial freedom – my hope is that we get you from your starting point to level 5, which is building generational wealth.
The Five Levels of Financial Freedom:
- Yikes (Financial Mayhem) – This is where a lot of people start out. You’re clueless and overwhelmed when it comes to your finances. You don’t know how much you owe, what the interest rates on your debts are, and you sure as heck don’t have ANY clue about what your credit score is!
- Financial Awareness – This stage is when you know exactly where you stand financially. You know how much you owe, who you owe, what the interest rates are, and what your credit score is.
- Financial Stability – This stage is when you’ve figured out some financial goals, you have a budget, and you have a plan for paying off debt.
- Financial Contentment – This stage is when you’ve finally paid off all of your debt, you have a bit of money to do small things like eating out, and you’ve begun doing some investing.
- Financial Independence – This is where you have enough money saved or invested to pay for all of your expenses. You can retire at this stage!
- Building Generational Wealth – This is where you start increasing your assets so you can give / donate or save up to give your children and grandchildren a better financial future. This is where I want you to be!
So now you know the different stages and the eventual end game… You’re probably wondering how the heck do you get to the point of financial independence and creating generational wealth?
Below is the roadmap that will get you to where you want to be financially.
Getting Your Mind Right (Mindset)
The first thing you need to do is get your mind right and prepare yourself.
Fixing your mindset will help you stay motivated while you pay off debt and work towards financial independence. You can change your mindset by getting support from your community, setting specific goals and working towards them, and doing things like saying affirmations.
The next thing you need to do is make sure your partner and family are aware of what you’re trying to do. Make sure you check in with them regularly so everyone is on the same page and you can keep each other motivated.
On top of your family and friends, it can be good to also be a part of a larger community that have the same goals. It can be really motivating to see other people paying off debt and building wealth!
If you’re looking for online communities to join, Instagram has an active personal finance community. You can look at hashtags like #debtfreecommunity, #finanicialindependence, and #millennialmoney to get started.
Knowing Where You Stand
You’ve got your mindset figured out, you have your family on board, you’ve discovered a community (or two) that you want to be a part of, now it’s time to actually figure out where you stand.
You need to find out how much you have saved already, how much you have invested, and what debts you owe – basically you need to calculate your net worth.
Net worth is a great metric to track and it can give you a quick overview of how your finances are doing. If you keep track of your net worth over time (monthly) you will be able to see your progress and you can celebrate all the milestones!
After you’ve calculated your net worth and you know how much your basic expenses are, it’s time to get your bills and financial paperwork organized.
Grab all of your bills and start sorting them, keep the ones that are super important, and get rid of any that are old, or unnecessary.
This is also a great time to start seeing if you can set up automatic payments and go paperless so you no longer receive bills in the mail.
Set up a place in your home where you keep all of your bills, this can be a filing cabinet or a command center, it just needs to be something. Make sure all financial documents and bills make it to this place as soon as you receive them and make sure to declutter your financial command center regularly.
Fix (Or Build) Your Credit
I know there are people out there that tell you that you don’t need to worry about your credit (because you can just pay everything in cash!), but credit can be a powerful tool.
If you ever need a home or car loan you’re going to need a good credit score. Also, there are some workplaces that check your credit.
You can check your credit score for free using tools like Credit Karma or Credit Sesame, and every year you can get your credit reports from the 3 credit bureaus for free. Check your credit reports for any errors and dispute them – accuracy is super important.
If you have any credit issues (missed payments, accounts in collections), make sure you start taking care of these issues so your score can begin improving.
If you don’t have any credit at all (maybe you’re a student), you can become an authorized user on someones account to help build some credit, and/or you can get yourself a secured credit card (a credit card that requires you to put down a deposit).
Save a Mini Emergency Fund
The next part of your financial journey should be a mini emergency fund / account buffer. This is $500-$1000 that you set aside for any emergencies so you can stop living paycheck to paycheck.
You can set this aside in a savings account or keep it in your checking account, just make sure you only use it for emergencies.
This mini emergency fund should be created as soon as possible. You can get the money by working overtime at your job, starting a side hustle, or selling some things you no longer use.
Start a Side Hustle
This step is sort of interchangeable with the budgeting step.
It’s important that you start a side hustle of some kind. Earning extra money on the side can help you get out of debt faster, or just give you some wiggle room in your budget for extras.
A side hustle doesn’t need to be a second job or something that takes up a ton of your free time. It can be something small that you do for a 30 minutes – 1 hour a week (like taking surveys).
Budgetttinggggg. This is where the good stuff happens.
Before you actually create a budget it’s important to see how much you’re currently spending. Try keeping track of everything you spend money on for a month.
After you’ve tracked your spending, you can now begin to create a budget. Start by figuring out your main expenses, the things you have to pay for each month (rent, utilities, etc), and then figure out from what’s left, how much you can spend on food, fun, savings, and of course debt repayment.
Share this budget with your partner if you have one to make sure you guys are both on the same page, and check in regularly to make sure you’re both sticking to the budget.
If you’ve never budgeted before just stick with a basic budget for about a month or two to get used to it, we’ll optimize things later.
After you get your basic budget up and running, you can start to tweak and optimize things to help you reach your goals.
One of the first things you should do (if you don’t already) is to make sure you’re contributing enough to your 401(k) to get the company match (if your company offers a match). This is free money!
Pay Off High-Interest Debt
Okay, you got your mini emergency fund, your budget going, and you’re saving a bit in your 401(k), now it’s time to focus on paying off that debt!
If you have debt that has an interest rate of over 6-7% you should focus on paying that off as quickly as possible, after you pay it off you can be free to save and invest more!
How you prioritize which debt to pay off first is up to you – but there are two main methods that people use: debt snowball and debt avalanche.
Debt Avalanche – This is where you pay off the debt with the highest interest rate first.
Debt Snowball – This is where you pay off the debt with the highest balance first.
Mathematically it’s more efficient to use the debt avalanche method since you will save on interest over time, but if you like the quick wins you get when you pay off the small balances – then do that!
The best method for paying off debt is the one you’ll actually stick with!
Grow the Emergency Fund
Congrats on knocking out that debt!
Now time to grow that emergency fund, you want at LEAST 3 months’ worth of expenses saved up. If you have an irregular income or kids I suggest saving at least 6 months’ worth of expenses.
Save Up For Retirement
You’re debt free, you have your emergency fund, next step is saving more for retirement.
The first step is figuring out how much you should be saving for retirement. According to Fidelity, you should aim to save at least 15% of your income (pre-tax) for retirement.
**But here are some caveats, this assumes you’re starting at age 25 and will save until age 67.
If you’re 30, Fidelity suggest saving 18% annually, and if you’re 35, they suggest saving 23% annually.
If you aren’t able to save 15%-25%, just start small. Start with 3-5% and bump it up from there. Try increasing your income through side hustles or making more with your day-job.
Now you know how much you should be saving, let’s talk about where to save the money.
If you have a 401(k) and you get a company match, you should already be saving some money – so that’s great!
The first stage of saving for retirement for most people should be maxing your Roth IRA, as of 2020, you can contribute a max of $6,000 a year to a Roth, so start there.
If you still have money left over to save, you can start bumping up your 401(k) contributions, you should try to max it out, or get as close as you can.
And if you still have money left over after maxing your Roth IRA and 401(k), then you can open a taxable investment account and invest in there and/or contribute to your HSA (health savings account) if you have one.
Work Towards Financial Independence
Ready to work towards financial independence?
First, you need to figure out how much you will need for financial independence.
The basic rule of thumb is 25x your expenses. So if you’re expenses are $40,000 annually, you will need $1,000,000 invested to retire.
Your number might seem huge, but if you optimize your expenses and increase your income, you can get there!
Build Generational Wealth + Invest More
Ayyyy you made it! You have enough to retire!
If you’re up for it, you can start building generational wealth.
You can increase your stock and ETF investments, or branch out into other types of investments like businesses or real estate.
The goal is to have enough for your children and their children. If you don’t have children, you build up investments that you can leave to charity / use the money to donate to causes you care about.