People always talk about how building wealth is hard. Personally, I think it is a mindset shift. We see rich people with big-time jobs making lots of money. In our heads, we think it is hard to accomplish these things. I hate to break it to you, it is not as hard as you think. Here is a roadmap to wealth.
Let’s really dive into what wealth really is. Is it all the money in the world? Nope.
Is it having a big house and fancy cars? Nope.
Is it having the most glamorous vacations? Wrong again.
Wealth is not about how much money you spend, it is about how much money you accumulate.
When we are working towards wealth, we want to accumulate assets. Being able to have income-producing assets helps us create passive income to help fund our life and retirement.
Our job when trying to become wealthy is to create good financial habits. These habits will lead us on the path to wealth.
It is time to believe in yourself and make a difference in your life.
Money Lessons not taught in school.
I know that most of us were in school for a bit of time in life. In school, we have failed to be taught basic financial literacy such as compounding interest, taxes, and owning assets. So some of these habits are a little foreign to us.
I am here to try to help guide you on your own path to wealth. This is going to be your roadmap to wealth.
Let’s start off with the basics.
Stop 1: An Emergency Fund
People talk about an emergency fund a lot. It is like one of the basic bricks to building the foundation of our financial house. We need to have a fund for emergencies.
How much are we talking?
Most people would say 3-6 months. Honestly, 6 months to me is a pretty good number. If something happens to you and you are out of work for more than 3 months then you will feel a crunch.
With six months of an emergency fund, you will have peace of mind. It will give you enough time to make arrangements to find employment or get supplements from the government as you search for employment.
Emergency funds are not just for loss of jobs, it is also for an emergency. Just 39% of Americans have the money to cover a $1000 emergency. Anything can happen.
For instance, if your car breaks down. You will need to get it repaired, maybe a rental, or buy a new car. These things can cost a lot of money. An emergency fund will be there to save you.
If you are looking to start on the right track, start saving to build an emergency fund. This should be one of the first steps you take on your roadmap to wealth.
Stop 2: Make a Budget.
Making emergency funds is imperative for your journey to wealth. Having a budget is another part of the journey. It is always best to know where you are in order to know where you are going.
“ Failure to plan is planning to fail”
We need to know where our money is going. I started budgeting in 2016 with a cool app called YNAB (You need a budget). It was all about saving money for the future and breaking that paycheck to paycheck lifestyle.
Not all budgets are for everyone, but needing to track how much you spend is part of the process of knowing where your money is going.
If you realize you spend more than 50% of your income on rent, well…. you may want to change things up a bit.
A budget is basically separating your costs in different categories.
Costs:
- Rent
- Food
- Savings
- Healthcare
- Transportation
These are just a few of things you can put down.
Different ways to make a budget
Elizabeth Warren came up with a budget that is simple for people to use. It is called the 50/30/20 budget.
50% goes to needs ( rent, utilities, etc. )
30% goes to wants ( entertainment, shopping)
20% goes to saving (investing, savings)
My friend Lionel from CentbyCent had his own personal view on the 50/30/20. Personal finance is personal.
This is just a simple one to help you on your road to wealth. Personally, my wife and I do not have a set budget.
We track our spendings on a google sheet. It makes it easy. We do have categories for each item, and we make sure to input them in the sheet to track how we are doing.
You can totally change these to fit your life. Personal finance is personal, and you make things work for you and your situation.
If you check out my Net Worth Statements. You will see that we try to save a lot of our money. We try to save anywhere between 50-65% of our money each month. It was through discipline and tracking our spending that we have been able to do this.
It is always best to know where your money is going. If you do not know where it is going you will end the month with nothing left and wonder where all your money has gone.
It is time to make a budget on this roadmap to wealth.
Stop 3: Pay off your debt
Debt is quite crippling. It can detour us on our journey to wealth easier than anything else. Student loans, credit card debt, and anything else is something that can cause stress, anxiety, and put us in a dire situation.
Our job is to get rid of this debt. In an ideal world, it would be nice to not have the debt, but circumstances happen that can cause debt. That is why we need a good emergency fund to help us in those emergency times.
Dave Ramsey is famous for talking about the Debt Snowball method. I am partial towards the Debt Avalanche method.
Debt Snowball:
Knocks out the smallest debt in order to get a feeling of accomplishment. It motivates you to knock out the next biggest debt.
Debt Avalanche:
Knocks out the highest interest loan in order to save the most money and not let the interest compound even more over time.
Both methods work, but I am partial to the Debt Avalanche. It saves more money, but it does feel like it can take a bit longer.
The Debt snowball will cost more in interest, but it will motivate you more to keep knocking out the debt.
Let’s make a decision and knock out some debt. Getting rid of debt removes any roadblocks on our journey to wealth.
Stop 4: Invest your savings
Saving needs to be a part of your roadmap to wealth. With these savings, you can go ahead and invest them.
Investing is a scary word. People wonder if they will lose their money. Is investing really worth it? They have seen it happen to family and friends and they do not want that to happen to them.
But investing is one of the only ways to create more wealth without earning more money. It is best to start investing now, or as soon as you can. The more time you have, the better your investments will do.
When we buy a house, we are investing in our future. Investing in income-producing assets helps our money to work for us.
Invest Simply with M1 Finance. You can easily set up an investment portfolio and automate everything. Make life simpler.
Compounding interest on investments
Let’s take a look at compounding interest.
Have you heard of compounding interest? It is the magic of the investing world. If your investment is growing at a rate of 7% per year you will be able to watch that money grow over time.
Let’s make this simple. At 7%, your investment will double every 10 years. This is using the Rule of 72, which states to divide the rate of return by 72 to find out how many years it will take the investment to double.
Since we now know how compounding interest works let’s see how we can use our money to grow.
Most people think investments are just the stock market. There are other markets you can get into.
- A business
- Real Estate
- Cryptocurrency
Business Insider/Andy Kiersz
Personal Finance is personal
Let's stop thinking about how others have lost money, let’s start thinking about how you can have your money make money for you.
I personally prefer the stock market. It is my preference. Now I am not a stock wiz. I will not try to sell you a course on how to be a stock wiz. Just keep it simple.
My strategy is buying index funds that track the whole market. You can go to Vanguard or Fidelity, buy VTSAX/VTI or FZROX, and be set. It is that easy.
You then have exposure to the whole U.S. Market with 3500 stocks. Be patient, let it grow for years, and then retire.
Now with investing, the earlier you start the more time you have for the investments to compound.
Stop 5: Hitting Financial Independence
Your last stop is financial independence. Once you hit financial independence you can do whatever you want. Keep in mind the financial habits you have built, but you have the ability to work anywhere.
Being financially independent gives you freedom of choice. You are now in control of your time because you no longer need to worry about money. The journey to wealth is almost finished. You can keep growing it or relax and enjoy it.
This is the sweet spot. The best part of the journey. It is what some would hope they reach by retirement age, some will reach it while they are young, and others may never reach it.
Use this roadmap to wealth, and make financial independence your last stop and goal.
The Roadmap to Wealth:
On your journey to wealth, there will be many stops along the way.
You will need to do the following:
- Start an Emergency fund
- Make a budget
- Pay off debt
- Invest the rest
- Hitting Financial Independence
These five simple things can really help you to set up a path for wealth. This is how I am doing it. I hope that you can do it too.
The steps are simple, but can be hard to implement. So keep pushing forward, and be patient.
“A little impatience will spoil great plans”
-A Chinese Proverb-
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” Spend less than you make, stay out of debt, and invest the rest”
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.
Great article :-). Do you think maintaining debt on a house is ok for the length of the mortgage?
Chris,
That is a great question. Usually a mortgage is considered good debt. It usually has a lower interest rate. Since the U.S. lowered the rates in 2020, many people have refinanced for the lower rates, and they can then use the additional money, not going towards their mortgage debt, to invest instead.
To answer your question, I would say Yes.
I hope this helps you out Chris.
Building wealth really is simple. Unfortunately, however, it’s not easy! That’s why many people find it so challenging to reach FI.
However, reading resources like this, that break the journey into different “stops” along the way, makes it far more approachable.
This was a great way to simplify the path to wealth and FI. Thanks for sharing and spreading helpful financial knowledge!
Thank you Chrissy,
You are right. Building wealth is not easy. If it was easy, everyone would be doing it. As I have encountered many new people in their journeys towards wealth I hope they can take a look at the roadmap to help guide their way.
Oftentimes, it can be hard knowing where to start.
Definitely more of a debt avalanche guy, but I understand the psychology behind the snowball. That said, if the debt is smaller, I’d get started on those investments before clearing all debt. I missed out on some pretty remarkable market returns by being too locked in on debt initially. This is a great roadmap!
I have been there. I was trying to knock out some of my student loans when I had great opportunities to invest instead. We all learn from experience.
Awesome advice as usual Steve, I wonder do you think people should put aside 6 months as they are right now, or six months of what they ‘think’ they could frugally live on in an emergency?
I think it would be 6 months of what they could frugally live on. I can live on a lot less if I was jobless.
The budget is absolutely essential. Even if you have money, if you spend more than you will make it just won’t last.
An emergency fund is very important, but it’s more important now than ever to be invested with banks paying almost no interests and inflation climbing.
Yes, contrary to the negative minds out there, you CAN build wealth on any income. The biggest factors to achieving it is savings rate and time.