If you didn’t get a financial education class in school, and didn’t grow up talking about money, there’s a good chance you’re bouncing around a million personal finance questions in your head every day. Because a confused mind says “no,” chances are, they remain unanswered. As a result, you don’t do anything with your money and you’re experiencing one or more of these scenarios:
- You’re living paycheck to paycheck
- Your debt doesn’t seem to be going down
- You can’t get a handle on your spending
- Paying bills is always a pain
- You don’t have savings
- You don’t have a system
- You’re always scrambling to pay for things
- You’re not saving for retirement
- And so on.
These questions, that are perfectly normal, by the way, range from
- Am I saving enough?
- Am I spending too much?
- How much is the right amount to spend on insert category here: food, housing, personal, entertainment, savings, transportation, utilities
- Should I be saving for retirement?
- How do I open a retirement account?
- What is a 401(k)?
- What’s an IRA?
- How much should I put in it?
- What is a match?
- And how do I pay off these student loans?
- Should I have 1 or 5 credit cards?
- How do I build my credit?
- Do I even need credit right now?
- How do I make my score go up?
- Should I rent or buy?
- How do I budget?
- Should I invest?
- What financial services companies can I trust?
That’s a lot of questions, and I get that it can be overwhelming.
It doesn’t have to be.
There is an “order of importance” when it comes to building the pillars of financial independence, and by focusing on one at a time, you can get the most bang for your buck.
The order of importance is this:
First, eliminate your high-interest debt.
Second, build savings.
Third, max your retirement accounts.
That’s it. This simple formula gives you the highest and best use of your dollars right now. By focusing on one thing at a time, in this order, you get the most bang for your buck.
Allow me to explain.
Your debt is costing you the most money, so the first priority is to get rid of it. The faster you pay it off, the less money you spend on it, and the more money you have to save. Also, the faster you pay it off, the more years you have to let your savings and retirement compound.
Next, cash is king, and having money in the bank means security, peace of mind, and more choices. Give yourself these gifts and get out of survival mode and into your flow. Save 3-6 months of essential expenses in a high-yield savings account.
Then, the third priority is to max out your tax-deferred and tax-sheltered retirement vehicles, such as a 401(k) or Individual Retirement Account (IRA). These accounts allow you to minimize one of the biggest expenses of your life- taxes. These accounts are also protected from bankruptcy and lawsuits.
The objective of personal finance is to securitize your ability to earn, to live independently, and to enjoy your life, and to give back. That’s why investing is the last piece. Investing is what grows your money. You can invest in yourself, the market, a business, real estate, and more. Home ownership is a component of investing.
To get started building the pillars, you’ll need to identify your Impact Factor. This is the money you have left over each month after you pay your bills. However much it is should be set up as an automatic payment or transfer to the pillar you are working on.
Pay yourself first by making sure your transfer or payment happens before any other spending every month.
Once you eliminate debt, apply your Impact Factor to savings until your Lighthouse Fund is fully funded (3-6 months of essential expenses).
Once the savings pillar is complete, max out your retirement contributions. When you are on track to have saved 25x your annual expenses, you’re ready to invest.
Get more helpful tips and resources for your journey to financial independence in my FREE mini-course, Five Days to FI.