Securing your family’s financial future can seem like an impossible task at times. So often we’re focused on having enough money at the end of the month just to pay the bills, and actually building wealth isn’t a priority.
But with the right approach and some patience, building wealth can be a very real possibility.
In this article I’ll present the plan that my wife and I followed (minus the missteps and mistakes along the way) to build our net worth by more than $1 million over the past ten years. We haven’t reached our goals yet, but we’re on track to meet those goals if we continue on with the plan.
Table of Contents
Step 1: Setting the Foundation
Building a skyscraper without an effective foundation would result in disaster. Likewise, if you want to grow your wealth as high as possible, you’ll need to start by prioritizing the foundation.
This step may not be the most exciting, but it’s important in order to have success with the other steps.
Tracking Expenses
The first step to managing your money effectively is to know where it is currently going. If you’re not tracking or recording your expenses you can only guess as to how much you’re spending in different areas.
Start by tracking everything you spend for a month or two, and organize all of the expenses into categories. You can add up the subtotals for each category, as well as the overall total. After doing this you’ll have a very clear picture of how you are really spending your money.
If you’re like most people, you’ll be surprised by how much you’re spending in some categories. Expenses can add up really quickly, and by tracking expenses you can be sure that you’re not overlooking the significance of any expenses.
Andrew uses Tiller to track his spending, while PT has an expense tracking template in Excel format that you can download and use.
Action step: Create a spreadsheet that you’ll use to record all of your expenses each day for the next month.
Creating a Budget
A lot of people cringe at the thought of budgeting, but it really doesn’t have to be painful.
Once you have been tracking your expenses for a month or two, you’ll know how much you are spending in each category. When you’re creating the budget you use that information to influence how much you allocate for each category.
If you create a budget before tracking your current expenses it’s likely that some of the amounts you’re allowing for different categories are way off compared to what you’re really spending.
Hopefully, tracking expenses helps you to identify a few categories where you can cut back. Just be sure that you’re creating a realistic budget that you can actually stick to, otherwise it will do no good.
Budgeting for Savings and Debt Elimination
There are two parts of the budget that are really key if you want to build wealth: 1) the amount that you will put towards debt payoff each month, and 2) the amount that you will save/invest each month.
If you don’t have enough room in the budget to save money each month you’ll need to find ways to reduce your spending or find a way to increase your income (we’ll look at both of these topics later in the article).
Action step: Create a family budget. If you need help, see my article How to Create a Budget that Works.
Paying Off Debt
Paying off debt is an important part of the foundation to your finances. Once you have the debt paid off you’ll be able to save and invest a lot more each month, which allows you to build wealth faster.
For now, we’re talking about debt aside from a mortgage. If you have credit card debt, student loans, car loans, or other types of personal debt, paying it off should be a priority.
Different Strategies for Paying Off Debt
There are a few different approaches to paying off debt. The most popular options are the debt snowball and the debt avalanche.
The debt snowball approach focuses on paying off debt with the smallest balance first. You’ll pay the minimum monthly payments on all of your debts except the one with the smallest balance, and you’ll pay as much as possible each month on that one until it is eliminated.
After you’ve paid off the smallest debt, you’ll move on to the one with the next smallest balance. The logic behind this approach is that it allows you to see results quickly, and you’ll feel great when you eliminate even small debts. That motivation will help you to stay engaged and committed as you work your way up.
The debt avalanche approach ignores balances and focuses first on the debt with the highest interest rate. You’ll pay the minimum monthly payment on all other debt, and apply as much as possible each month to the debt with the highest interest rate.
Which debt payoff approach you choose is up to you. The important thing is that you stick with it until your debt (aside from a mortgage) is paid off.
Action step: Create a spreadsheet that lists all of your debts, including current balance, minimum monthly payment, and interest rate.
Set Financial Goals
The last aspect of the foundation that we’ll look at is to set your financial goals. Your goals should be specific and measurable, and also time sensitive.
For example, your goal could be to have a net worth of $1,000,000 by the time you are 50 years old. Or, to add $5,000 to your savings account in one year. Both of these goals are measurable and have an endpoint or deadline.
I recommend having both long-term and short-term goals. Long-term goals are great for the big picture vision, and short-term goals are more likely to keep you motivated right now.
Action step: Decide on short-term and long-term financial goals and write them down.
Step 2: Saving Money
Once you have the foundation in place, which can take some time if you have a lot of debt to pay off, you can move on to the next step. At this point, you should focus on saving as much as possible.
The goal of this step is to increase your savings rate. Your savings rate is simply the percentage of your disposable income that you save or invest. For example, if your after-tax income is $5,000 per month, you spend $4,000 and save the other $1,000, you have a savings rate of 20%.
There are basically two ways to increase your savings rate: 1) spend less, or 2) make more money without increasing expenses. Right now we’ll focus on spending less, and we’ll look at making more in step #4.
Look at the Biggest Expenses in Your Budget
If you want to have a big impact on your savings, start by evaluating the areas where you are currently spending the most money. Cutting back in these areas can have a big impact on your overall budget.
Housing
For most of us, housing is one of the biggest expenses. You may or may not be able to reduce your monthly spending here, but you should at least look at a few possibilities like refinancing your mortgage, renting out part of your home, and appealing your assessed value or property taxes.
If your current home is costing you too much money you can also consider moving. However, moving brings a lot of added costs, not to mention inconvenience, so I wouldn’t recommend doing it for just a small amount of savings each month.
Need more saving ideas? Here are 30+ Ways to Save Money on Utilities in Your Home.
Food
Food is another big expense for most families. If you eat a lot of meals at restaurants you could easily save a lot of money by making more meals at home. If you’re eating out several times per week this can add up to huge savings over the course of the year.
If you’re already making most of your meals at home you could consider meal planning as a way to get the grocery expenses even lower.
Looking to cut your grocery bill? Here’s some great ways to save on groceries.
Cars
Car payments also account for major parts of most family budgets. If you own multiple cars and have a monthly payment on each, you can easily spend close to $1,000 per month, or even more, on cars.
One of the best ways to save more is to drive less-expensive cars that you can afford to buy with cash. You can also keep your cars longer to get more out of them before replacing.
Basically, you want to look at the line items that are taking up the biggest parts of your budget and see what you can do to reduce those expenses. You probably won’t be able to reduce them all, but cutting back on your biggest monthly expenses can have a huge impact on your budget.
For a lot of ideas see 250 Ways to Save Money.
Action step: Evaluate the five largest expenses in your budget to see if you can reduce these expenses.
Look for Easy Wins
Most of us have some areas in our budget that can be reduced without much effort, and without a major impact on our lives. I call these “easy wins”. They may not account for a huge amount of money individually, but the money that you save from a few easy wins can really add up.
Every family’s budget is different, but there are a few categories that tend to be ideal for easy wins.
Cell Phone
How much do you pay every month for your cell phone service? A few years ago my wife and I moved away from one of the leading carriers to go with a discount pre-paid carrier. At the time, we switched to Boost Mobile and literally cut our monthly bill in half.
It was probably the easiest money I ever saved because the service was just as good and it had zero impact on our lives. About a year ago we moved from Boost Mobile to Cricket Wireless. Our monthly payment is the same, but the service is a little better, based on my experience.
There are several companies like Boost, Cricket, Freedom Pop, Republic Wireless, and Mint Mobile that can save you a lot of money.
Also, think about the cell phone that you use. Are you paying monthly for your phone? If so, you can save a lot of money by going with a cheaper phone.
I used to buy the latest Android phones, but when I moved to Cricket I got a cheap model. The cheap phone does everything I need, and I can’t believe I used to pay hundreds of dollars for a more expensive phone.
TV
TV is another area that is ideal for easy wins. If you have cable or a satellite dish you could save a lot of money by canceling that service.
My wife and I cut the cord about 5 years ago and we’ve never missed it. Now we use Netflix for almost all of our TV and movies, and during football season I pay $25 per month for Sling.
Other Easy Wins
Other easy wins might include switching your car or homeowner’s insurance, canceling a gym membership that you rarely use, or packing your lunch instead of buying it.
Trim is a great service that will help you find unneeded subscriptions that you can cancel to save money. They can also negotiate your cable bill, and help you to find cheaper car insurance.
Action step: Find at least one “easy win” to save money in your budget, and sign up for Trim to see if it can find any other savings.
Step 3: Investing
So far we’ve looked at laying the foundation for building wealth and ways to save money each month. Once you’ve reached this third step you will have your debt paid off and you’ll have some money each month that you can use for saving and investing.
If you’ve made it this far, you’re doing a great job! But in order to build wealth, you’ll need to invest effectively.
This step can be overwhelming and confusing for a lot of people, but it really doesn’t have to be that way. You don’t need to be an expert at picking stocks in order to invest effectively (thank goodness, because most of us would fail if that were the case).
Have a Simple Plan
There are all kinds of investment options, but for most of us, a simple approach will work the best. Fortunately, there are some simple investments that can produce a good return.
Emergency Fund
Before you start investing, I highly recommend that you have an emergency fund in case something unexpected were to happen.
At a minimum, you should have $1,000 – $2,000 in an emergency fund. Ideally, your emergency fund will have enough money to cover a few months of your family’s living expenses.
I prefer to keep this emergency money in a high-yield savings or money market account that is easy to access quickly.
After you have the emergency fund in place, you can start investing.
Index Funds
One of the most effective, and simple, ways to invest is to use index funds. Index funds are mutual funds or ETFs whose portfolio is designed to replicate a certain market index, rather than being actively managed.
They are a great simple investment because they allow investors to benefit from good long-term gains, and they typically have very low fees.
You don’t need to be a stock market expert in order to invest in an index fund from a company like Vanguard or Fidelity. But even without expertise, index funds are capable of producing very good long-term returns.
Physician on FIRE has an excellent article Investing in a Three Fund Portfolio Across Multiple Accounts that lays out a very simple investing plan. This approach uses a total US stock market fund, a total bond fund, and a total international fund. If you’re looking for a simple investment approach, this is a great option.
Action step: Decide on a simple investment plan involving index funds (or other investments of your choice).
Invest in Tax-Advantaged Accounts When Possible
If your employer offers a 401(k) plan as a benefit, you should definitely take advantage of it. Investing in your 401(k) will not only allow you to prepare for retirement, but your contributions will reduce your taxable income, which means you’ll pay less in income tax. Contributions to traditional IRA’s also work the same way.
Contributions that you make to a Roth IRA will not reduce your taxable income now, but your earnings and withdrawals will be tax-free in the future, assuming you follow the basic guidelines.
The tax benefits of contributing to 401(k)’s and IRA’s can be huge, and you should definitely make it a priority in your investing.
For 2018 you can contribute up to $18,500 into a 401(k) and up to $5,500 into an IRA. There are some income restrictions for IRA’s. Check this page to see if you qualify.
Order of Priorities
My recommended order of priority is:
- Contribute enough into your 401(k) to get the maximum match offered by your employer.
- Max your Roth IRA contributions.
- If you still have money to invest, max out your 401(k) contributions
If you do all of those and you still have more money to invest, that’s when you should look at non-tax-advantaged accounts with a company like Vanguard or Fidelity.
Action step: Set up automated contributions for your 401(k). Open a Roth IRA and/or Traditional IRA if you don’t already have them.
Step 4: Increasing Income
Now, we’re reaching the final step. So far we’ve looked at setting a solid foundation, finding ways to save money, and creating an effective investment plan to start building wealth.
If you continue to save and invest each year you should be well on your way. But if you want to accelerate the process, you can look at ways to increase your income.
Increasing your income will allow you to save and invest more each year (assuming your expenses remain the same, or increase slower than your income).
Increasing Your Income at Your Job
If you’re trying to increase your income, the first place you should look is your current job. The possibilities for increasing income include working overtime (if you’re paid for overtime), getting a raise, getting a promotion, or taking a higher-paying job in a different department with your company.
Overtime can be a good option if it’s available to you, and if it doesn’t interfere with your family life. Just be sure to keep a healthy work-life balance.
Getting a Raise
Getting a raise can be one of the best ways to increase your income. If you’re able to get a raise you’ll be paid more for the same work you currently do, with no overtime needed. Not only that, but most companies use percentage-based raises.
For example, after an annual employee review, you might get a 5% raise. Over a period of time, the raises compound. So if you are able to get a raise now, each of your future percentage-based raises will have a bigger impact.
Before you ask for a raise you need to get prepared. This isn’t something you’ll be able to do all the time, so make it count and give yourself the best chance for success.
You’ll need to be able to justify the reason you deserve the raise. It could be that you regularly do work that is beyond the scope of your job description. Or maybe you have established goals or quotas that you are supposed to meet, and you exceed them. Any type of justification can help your cause, and numbers or statistics are especially powerful.
Other Jobs
If getting a raise for your current job isn’t an option, maybe there are other job openings at your company that you can apply for.
If you’re open to leaving your employer you may also find a better-paying job that way. A lot of times it seems like switching companies is a better, faster way to move up the pay scale.
Certification
Although it may not be a quick solution, working towards some type of certification can also be a great way to increase your income.
Action step: Evaluate your current job to see if you can justify a request for a raise. If not, consider the possibilities for working overtime or looking for another job with your employer or at another company. Consider certifications that you could pursue.
Starting a Side Hustle
Another way to increase your income is to start a side hustle (a side hustle is anything that makes money aside from your full-time job).
Personally, I’m a big fan of side hustles. About 12 years ago I started a web design and blogging side hustle, and it turned into a full-time business that I’ve been running for 10 years now.
Side hustles are popular because there are so many different possibilities, and the flexibility allows you to make extra money on your own schedule and on your own terms.
Some side hustles, like starting a business, will require a lot of work before you see results. While these types of side hustles require some patience, they generally also have high-income potential.
Other side hustles will allow you to start making money right away (like mowing lawns, freelance writing, driving for Uber, etc).
If you’re considering a side hustle, think about your goals and what you want to get out of it. If you’re just looking for a small amount of extra money each month, consider a side hustle that allows you to start making money right away. If you want something that has the potential to produce a full-time income, consider starting your own business.
For a huge list of ideas, see Ways to Make Money: 150+ Side Hustle Ideas for Your Spare Time.
Once you have increased your income, regardless of whether it is through your job or a side hustle, you’ll have more money that you can invest each month. The result will be a quicker growth of wealth, and you’ll be well on your way to reaching your long-term goals.
Action step: Decide if a side hustle would fit into your schedule, and if so, choose the right one for you and your family.
Conclusion:
Building wealth can seem like a daunting process, but it really doesn’t need to be that complicated. You can follow the basic steps outlined in this article to take control of your finances and get on the path toward your goals.
Author bio: Marc is a personal finance blogger at Vital Dollar. He has been running his own online business since 2008 with websites in different industries like web design, photography, travel, and finance.
