People work best when they have a plan. For money, that plan often includes an order of operations, or a step by step guide of what to do with their money. This is Cash Uncomplicated’s money steps.
How to Use This Blog Post
Use this guide as a roadmap to your money. Refer back to it at the start of every year to make sure you’re following the plan and are on track. Take it step by step and it will lead you to big financial wins.
Some of the steps will be one and done. For example, paying off high interest consumer debt will be done once and hopefully never again because you won’t fall back into it. Other things will be done yearly like maxing out your HSA and Roth IRA.
Number 1: Start a Beginning Emergency Fund
This is not going to be, nor is it intended to be your final emergency fund. It’s just the beginning to keep you out of trouble while you’re accomplishing your other money goals like getting out of consumer debt.
This amount should cover most emergencies and your highest insurance deductibles. For most people this is going to be somewhere in the neighborhood of $2,500-$5,000. This will give you padding for the inevitable emergencies like the car breaking, a trip to the ER, hot water heater needing to be repaired, etc.
If you have a beginning emergency fund large enough to cover your biggest insurance deductible, then you also have some security for the even bigger items like roof damage from a major storm, a car being totaled, etc.
To reiterate, this is not your final emergency fund, it’s just a starter fund to give you a little extra padding, avoid major disaster, and sleep better at night.
Number 2: Pay Off All High Interest Consumer Debt
Step number two is to pay off all high interest consumer debt. Paying off this debt will give you a solid base you’ll be able to work with for the rest of your life. For success with money, it’s essential to have a solid base, or a clean foundation.
Not having any consumer debt is just that foundation. Here’s what happens if you don’t have that base. Imagine someone has $20,000 in credit card debt at an interest rate in the low twenties. Without paying off that debt, they are perpetually behind with their finances and trying to just stay afloat.
While someone with a clean base has the ability to use their income to invest, build an emergency fund, and have some disposable income. Getting rid of high interest consumer debt is one of the most freeing things anyone can do to help their money situation.
What would be categorized as high interest consumer debt? Anything over six percent is worth talking about and anything over eight percent certainly qualifies. Credit cards in the high teens and twenties are a no brainer to pay off.
Credit cards, car loans, personal loans, store credit are all examples of high interest consumer debt.
Number 3: Take the Company Match
Take the company match if your employer offers it. It’s free money and a guaranteed 100 percent return. For example, if your company has a match up to $5,000 then you invest $5,000 and your company matches your $5,000. That match literally doubles your money from $5,000 to $10,000 and that’s completely independent of whatever the market is doing.
Then you have $10,000 in the market that will compound to much bigger numbers over the years. It starts with the match though as it’s the catalyst to outsized returns.
Number 4: Create an Emergency Fund of 3 Months
This is where I differ from most money advice you hear on the internet. I don’t see why you need to go straight into a large emergency fund at this stage of the game. After you’ve taken the company match, create some financial security by building an emergency fund of three months.
Three months will give you the extra security you need in case of things like the emergencies listed earlier as well as temporary job losses or reductions in income. It’s enough breathing room to feel good about your money situation and have a little bit of financial security.
This is more than a starter emergency fund, but less than what your final one is going to be. It’s a nice middle ground while you’re still building your wealth and have the ability to meet maximum contributions to your Roth IRA and HSA.
Number 5: Max Out Your Roth IRA and HSA
Both your Roth IRA and HSA have yearly maximum contributions so you want to make those contributions yearly if you have the ability. Both the Roth IRA and HSA have such great advantages that I recommend prioritizing them over almost everything other than paying off high interest consumer debt and building an adequate emergency fund.
Just like paying off high interest consumer debt creates a solid foundation, having a base of money in a tax-advantaged account puts you into great financial strength.
Number 6: Pay Off Low Interest Debt
Now it’s time to attack low interest debt like some student loans and lower interest car notes. When I say low interest, I mean somewhere in the neighborhood of two to five percent. Start paying these off and rid yourself of leaks in the boat.
I’m a big believer in eliminating debt, even if it’s not the most optimal thing to do because the debt is such a low interest rate. I like to clear up debt (other than real estate debt) because it just has a way of lingering around and messing with your life. It’s always a bill to be paid and it’s a serious impairment to wealth building.
The pure numbers say to invest heavily before paying off these debts but I’m not just about the numbers. I’m about creating the best life situation possible and creating a solid base free of most debt.
Number 7: Expand Your Emergency Fund to 9-18 Months
You’re on really solid ground now, and you’re about to make your money situation even better by expanding your emergency fund. I know, nine to eighteen months is a really big range. That’s because it depends on your life situation, like the stability of your job/income, kids, and other family responsibilities.
A nurse with a stable job outlook can probably go on the lower end of the spectrum while a business owner with seasonal fluctuations in income will be on the higher side. Personally, I layer my emergency fund, and I explain how I do it in this post.
Number 8: Max Out Employee Sponsored Retirement Accounts and/or Invest in Alternative Assets
Number eight is to max out employee sponsored retirement accounts and/or invest in alternative assets. You can even do a combination of these. For example, Juan and Tracy make $230,000 combined income.
Juan contributes $19,000 per year to his 401k and Tracy contributes $14,000 per year. They’re not done though. With the remaining funds available to invest, Juan and Tracy save for a down payment on a rental property. Every few years they buy a new property.
They project that 12 years from now, they will have almost two million in their 401k’s and about $4,500 in monthly cashflow from their rental properties. Since they both live intentionally, this should be about enough to be financially independent.
Number 9: Generational Wealth
Step nine is creating generational wealth. By this step, all high interest consumer debt is long gone, there’s a fully funded emergency account, and retirement accounts are maxed out. This is the step where you can do the extras.
Things like contributing to a brokerage account, expanding on real estate holdings, paying off the house early, speculating in riskier investments, etc. It can also include contributing to your children’s 529 plan.
If you’re on step nine, you’re on the trajectory to create great wealth. You’ve already established an incredible base without consumer debt and maxing out your retirement accounts. On this step, you’re already winning the game–just keep doing what you’re doing.
