Wealth is often viewed as an elusive pipe dream for many. However, the path to financial success isn’t a mystery—it’s a well-traveled road paved with strategic decisions, discipline, and a vision for the future. In today’s world, where the notion of financial security is more critical than ever, understanding the steps to attain wealth is not just empowering but essential.
In this guide, we will dive into four simple steps that can significantly shape your financial future. These steps aren’t exclusive to the elite, they are time tested principles that anyone can follow, regardless of their current economic standing. Following these steps is about taking control, making informed choices, and steering your financial future towards stability and success.
Step 1: Start a Budget
Making a budget means taking control of your money. Each dollar has a job to do. Some dollars work to pay off what you owe, like a debt. Others work to grow more money, like investing. When you tell your dollars where to go, you’re in charge of making your money work for you.
To make a budget, write down your income and your expenses. This helps you see if you’re spending more than you make. If you are, it’s good to find ways to spend a bit less. That could mean not buying some things you don’t really need or finding cheaper options for what you like.
It’s important to keep track of your budget every month. Sometimes, you might need to change it if things are different, like if you get more money or have to spend more. A budget helps you make choices about your money and helps you save for things you really want.
Step 2: Paying Down Credit Card Debt
Having a lot of credit card debt is like having a big weight on your shoulders dragging your financial future down. Credit cards can be a convenient option to cash, you get points, it’s easier to track your spending and a credit card takes up less space in your pockets. But if you can’t pay the credit card balance in full at the end of the month, you have to pay interest which can be 22%, 24%, sometimes even 26%. If you don’t have a budget, your credit card debt can quickly spiral out of control.
It’s important to try paying more than just the smallest amount you owe each month. That way, you can pay off what you owe faster and don’t have to pay as much interest.
If you have more than one credit card with different amounts you owe, you might choose to focus on paying off the card with the highest interest first. That card is costing you the most extra money. By paying off that card, you free up more money to pay off the rest.
Paying off your credit card debt bit by bit helps you feel better and gives you more money to do things you really want without that extra weight of owing money.
Step 3: Building an Emergency Fund
Life can throw unexpected curveballs, like a sudden car repair or a surprise medical expense. That’s where an emergency fund steps in—it’s your safety net, a reserve of money set aside specifically for these surprises.
To create an emergency fund, start by setting aside a portion of the money you earn. Put this money in a high yield savings account, that way this cash is earning interest and it’s easy to access when needed. The goal is to set aside enough money that could cover your essential living expenses for a period of about 3 to 6 months. These should include necessities like groceries, rent or mortgage payments, and other crucial bills. As mentioned in step 1, creating a budget helps you understand the cost of these expenses. Knowing these costs precisely will guide you in determining the exact amount to save for your emergency fund.
It’s crucial to understand that this money isn’t for everyday spending or fun purchases. It’s specifically reserved for unexpected, urgent situations. Having an emergency fund means you’re better prepared for these unexpected moments. Remember, in life shit happens, but an emergency fund provides peace of mind, knowing that you have a financial cushion to fall back on when life throws you a surprise curveball.
Step 4: Setting Up 401(k), Roth IRA, and Beginning to Invest
Now that you’ve laid a strong foundation with budgeting, tackling debt, and creating an emergency fund, it’s time to secure your future through investing. Two key tools for this are the 401(k) and Roth IRA.
A 401(k) is a retirement savings plan offered by many employers. It allows you to save and invest a portion of your paycheck before taxes are taken out. Some employers might even match a part of what you contribute, which is free money for your future! To get started, talk to your employer’s HR department to enroll in the 401(k) plan. They’ll help you understand how it works and choose the investment options available to you.
A Roth IRA is a type of individual retirement account that you can open on your own. It’s funded with money you’ve already paid taxes on, so when you withdraw the money in retirement, it’s typically tax-free. You can set up a Roth IRA through financial institutions or online brokerages. Look for low-cost options and understand the investment choices they offer. Contributing regularly to a Roth IRA can significantly boost your retirement savings.
After establishing your retirement accounts, it’s time to decide how to invest within them. There are two approaches you can consider: the passive investor or the enterprising investor.
1. The Passive Investor:
The term might sound negative, but it’s actually a smart choice for many. If you’re not keen on digging into stocks and doing extensive investment research, you can opt for a low-cost index fund that tracks the S&P 500. This type of fund essentially mirrors the overall market performance. While this might seem average, in the investment world, ‘average’ is a great spot to be. Many professional fund managers struggle to beat the market consistently. By staying in line with the market without delving into extensive research, sometimes it pays to skip the homework.
2. The Enterprising Investor:
On the other hand, if you have a genuine interest in stocks and are ready to put in the work—digging into annual reports, finding hidden market values, and understanding individual companies—then the enterprising approach might suit you. Here, the strategy involves choosing specific stocks and holding onto them for the long term. But a word of caution: outperforming the market is a challenging feat. Many individuals aiming to beat the market find it difficult to do so consistently. However, if you have a knack for selecting winning stocks and can outpace the market by a few percentage points yearly, the long-term rewards can be significant.
It’s important to note that even a small outperformance, over the years, can lead to substantial results over time. Take a moment to explore a compound interest calculator online—plugging in different numbers can be eye-opening and reveal how small gains add up significantly over the years.
Remember, starting to invest doesn’t need a lot of money. Even small, regular contributions to your 401(k) and Roth IRA can grow significantly over time due to compound interest. The sooner you start, the more time your money has to grow.
Takeaway
Achieving financial security doesn’t have to be a mystery. It’s about taking control and making informed choices. By budgeting, paying down debt, establishing an emergency fund, and investing for the longterm, you will see your net worth will sky rocket.
Consistency is key. Starting small and sticking to these practices can significantly impact your financial future. By following these steps, you’re taking essential strides towards a more secure tomorrow.
