When it comes to personal finance, it can be really hard to know where to start. Should you pay off your debt or build up your savings? Are you ready to start investing?
Doing things in the right order makes a big difference to your ability to build wealth and make the most of your money.
So, I'm going to tell you how to build wealth in five steps. This is the proven step-by-step method we've used to help thousands of women take control of their financial future.
Step 1: Spend Less Than You Make Every Month
Building wealth starts with learning to save. If you don't get your spending under control, you won't be able to save, invest or make any improvements to your financial situation. You need money left over at the end of the month in order to move your financial goals forward. This simply means that you need more money coming in than you have going out every month.
Depending on your situation, you may need to focus on increasing your income by asking for a promotion or a raise or finding a side hustle, or you may need to focus on decreasing your expenses. You really don't want to be spending more than 80% of your monthly income. No more than 50% of your income on needs like housing or food and 30% on wants — things that make life a little extra fun.
Step 2: Pay Off High Interest-Rate Debt
Once you have some money left over at the end of the month, the next step is to use it to pay off any high-interest rate debt, meaning any debt with an interest rate over 7%.
Why is this important? Well, high-interest rate debt cancels out the financial gains that you can make from investing. It costs you more to carry the debt. Then you're likely to earn as a return on your investment. So, you have to get rid of the debt first to start paying off your debt.
Select the debt that has the highest interest rate and start putting more than the minimum amount towards it. After you've paid that debt off, start paying down the debt that has the next highest interest rate. And you can add the amount that you used to pay monthly on the first death that you've now cleared to your monthly payment on the second debt.
When you do this, the amount you can pay towards each debt increases with each debt, you pay off, repeat this until you've cleared all debt that is charging you a 7% interest or more.
Step 3: Build an Emergency Fund
An emergency fund is cash that's set aside for life's unexpected events, like unemployment, car accidents, or medical emergencies. And this is in place to prevent you from going back into debt.
At minimum, you should have $1,000 in your emergency fund, but you should ideally build it up to six weeks to six months of expenses, depending on your situation and your comfort level. If you have good backup options — like you can always move back in with your parents or get a job with your uncle — then you can get away with having a smaller emergency fund. But if you have a lot of responsibility, like dependents who you provide for, you'll want a larger emergency fund for more security.
I recommend calculating your emergency fund savings goal and then setting up a monthly auto-saving to move money into a separate account each month automatically.
Step 4: Save for Retirement
Now that you're prepared to take care of present you in case of an emergency, we need to prepare to take care of future you. And one thing we predict is that future you is going to retire one day.
Saving for retirement is all about building up your savings so that once you stop earning income, you still have money to live off of. In this step, you want to max out your retirement accounts and put money away for future you.
Step 5: Invest
Now it's time to use your saved money to buy assets that appreciate and earn money all on their own. You are going to invest your retirement savings, then you can take on more aggressive and higher risk, higher return investments as well.
Don't know how to start investing? Check this out.
You can learn more about how to build wealth in our free masterclass, Think Like an Investor.
There is a straight path forward from your current financial situation to where you want to be financially, and doing things in the right order will get you there a lot faster. So, if you want to know how to build wealth, just follow our roadmap.
If you want to take your training even further, sign up for our free training, Think Like an Investor. Even if you're not ready to invest right now, starting to change your mindset and thinking the way that investors do will kickstart positive changes to your financial future.