I always love playing poker–hanging out with friends and the thought of going all-in just to say the words. I play for the joy of having friends over and to have a couple of beers with them. Unfortunately, too many people gamble with their financial situation. They might not go to a casino, but they don’t set themselves up intentionally to build wealth. They wait for a big break or some luck in order to win with money, which never comes. All their money gets spent, and they feel defeated.
Why You Need a Plan
Most Americans live paycheck to paycheck, and most Americans don’t know where to start to save or pay off debt or build wealth. I know of a couple who are making $125,000 a year and struggling to save anything! I know of people who are frugal and live on less than $30,000 a year. How can it be that the $30,000 a year people can live on that, but a couple making $125,000 cannot get ahead? It doesn’t make sense to me, except that one of these has a plan for their money, and the other does not.
You need to have a financial plan. If you do not know where you are heading, you won’t get there. If you’re going on a family vacation and you don’t know which direction to start driving, you will not arrive at the destination that you wanted to. It’s the same with your financial goals. You need to first define your goals, and then you need to have a plan to reach those goals.
The Plan to Build Wealth
Dave Ramsey’s Baby Steps is a good plan to follow if you want to build wealth. First, start by saving $1000. After you have a thousand dollars saved start eliminating your debt. For the most part, it doesn’t matter if you use the Snowball method or the Avalanche method or a mixture of the two. One thing is for sure, if you don’t start paying off your debt you will never pay it off. I will discuss in a later post about the advantages and disadvantages of using the snowball or avalanche method.
The next step is to save for a fully funded emergency fund. You’ll want to get your savings up to 3 to 6 months of your monthly expenses. This will give you a cushion of money if you lose your job, or if you have a large emergency expense. After this, we’re going to start saving for retirement. There is really no need to save for retirement until you have your debt eliminated and an emergency fund in place. The faster you can get out of debt the better chance you will have succeeding getting out of debt. So, before we start saving for retirement, let’s get out of debt and get an emergency fund established.
While saving for retirement, you can also save for your children’s college expenses. This step is optional. Some of you do not have children, so you can skip this step. While you’re saving for retirement and your children’s college this is also the time you need to focus on getting rid of your mortgage. Don’t fall into the trap that having a loan and a mortgage deduction is beneficial. Almost no one itemizes when filing their taxes anymore since the last tax bill was passed. Just imagine what you could do if you had no mortgage payment.
There are other plans out there that also work, and having a plan is good and beneficial for everyone. No matter which plan you follow, if you don’t cut your lifestyle back, especially back enough so you are living within your means, you will never build wealth. It doesn’t matter which plan you are on or which plan you decide to follow. Even if you’re a doctor making $250,000 a year, if you’re spending it all on your house, car payments, and shopping you will never build wealth.
Where Do You Rank?
In the next posts, I will go into each step of Dave Ramsey’s Baby Steps, so you have some practical examples of how to complete each step. For now, think about where you are on this scale:
- Enough assets to not have to work (Financial Independence/Retirement)
- I have an emergency fund, and have my retirement accounts maxed
- No debt except for my mortgage, and I am paying a few thousand a month extra towards it
- No debt, and I am building my emergency fund
- I have debt, but I am on a plan to pay it off in less than two years
- I started my budget, but I have so much debt and have no plan in place to eliminate it
- My debt will outlive me
No matter where you are on this scale, you need to have a plan to get to the next level. The next seven posts will walk you through the Baby Steps for building wealth. Don’t sit around and wait for a streak of good luck. Follow a plan and be intentional with your money. This is how you win with money.