Step 2: Save Money
There are 4 reasons we save money:
3. Building Wealth
All four are important, and we will get to all of them. However, the most important thing you need to do right away is to set up for Emergencies.
Whether you believe it or not, emergencies are going to happen to you, me, and everyone you know. The transmission goes out, the hot water heater quits, and you wake up to find a tree fell on your car. The point is to get ready for the unexpected.
How much should you Save for Emergencies?
Eventually you will need a 3 – 6 month emergency fund, but first let’s set yourself up with a small $1,000 – $2,000 emergency fund. Why? Well, you’re going to need something between you and a small financial hiccup while you’re working your way to get out of debt. Also, we don’t have the time (or money) to be saving up for a 6 month emergency fund while we are in debt.
Save up $1,000 – $2,000 for Emergencies
As quickly as you can, save up your starter emergency fund. I tell people they need to do this in 30 days or less. For some of you, this step is already done and you’re on to Step 3. However, for others this is going to be tough. Don’t feel bad, 64% of Americans cannot write a check right now for $1,000. That’s scary.
Whatever you need to do to get to your starter emergency fund ($1k – $2k) in 30 days is what it may take. Sell everything you can think of on eBay and Craigslist, pick up some side work and squeeze that budget to get every extra dollar out.
When you save up this starter emergency fund, you’re going to feel something….a win! This is a BIG deal. You finally have taken that first GIANT step towards a better financial future. If you make it this far, you have an extremely high rate of seeing your way all the way towards debt freedom.
Related: 84 Side Hustle Ideas
Step 3: Get out of Debt (the right way)
Debt really is stupid. You have much better things you want to be doing with your money than sending it to the lenders in the form of payments each month. I want you to become debt free because I can tell you the feeling is ah-may-zing!
But how and where do you start, right? I have you covered…
The Debt Snowball
The Debt Snowball is the #1 way I recommend to get out of debt. The reason: it works every time. How you set the Debt Snowball is:
1. Line up all of your debts (except the mortgage) from smallest balance to largest balance
2. Ignore the Interest Rates (What?!) Yes, you better believe it
3. Make minimum payments on all of your debts
4. Send every extra dollar to the top (smallest) debt
5. Once 1st one is paid off, roll over into the next debt below
6. Repeat until all debt is wiped out
The Debt Snowball works because you feel immediate wins. When you pay off a small debt first, you feel motivated. When you pay off the next one, you start to believe debt freedom is possible. When you reach your last debt, you are going to already be a debt payoff rockstar and you won’t give up. This is called a behavior change.
Step 4: Finish the Emergency Fund
Once you have all of your debt paid off (except the mortgage), don’t forget you still need to go back and strengthen the starter Emergency Fund. This is where you are going to go from the $1k – $2k starter emergency fund, to a fully funded 3 – 6 month emergency fund.
This doesn’t mean 3 – 6 months of income, it means 3 – 6 months of necessary expenses. If you are tapping into your emergency fund, you’re not playing Candy Crush on your smartphone and you’re not having a ribeye at your favorite steakhouse. You’re in minimal lifestyle mode while you get back on your feet.
Why 3 months? Why 6 months?
This is based on your own situation. If you have a steady paycheck and small expenses in your life, then you’re going to be okay with only a 3 month emergency fund. If you have a lot of overhead, high expenses, and you are on commission only income, then I would lean towards a 6 month emergency fund.
If you think you need more, then you probably do. 3 – 6 months is really just a cool phrase used in the financial world. Go with what you feel is an amount that is going to allow you sleep better at night. If you’re wondering, we have a 4 month emergency fund.
Step 5: Build Wealth, Give, and Live
Now the only debt you have left is your mortgage and you have $10k – $20k in the bank earmarked for emergencies. Life is good, right? Now it’s time to become the bank! Instead of paying interest each month, it’s time to make interest inside of investments. Whether you’re looking to save up more for retirement, invest in real estate, or start and grow a business – you can! Remember all the money you were throwing at debt? Remember all that money you were throwing at your emergency fund? It’s actually yours now 🙂 Go build wealth.
Spend Some Money
I also want you to be able to spend some of your money on “stuff”. Yup, you read that right – a personal finance website that is telling you to go out and buy some stuff. Why not, you’re debt free remember? However don’t go back into debt to buy more stuff or to go on vacation. There is a smarter way to save up for things you would like in your life.
Related: Save Money with Sinking Funds
Give Money Away
The most fun you will have with money is when you give some of it away. Many of you have been wanting to help out a friend, change the life of a someone who is hurting, or simply buy a cup of coffee for the stranger behind you in line. Well, now you can. When you’re debt free with money in the bank, it’s way more fun (and a lot easier) to give some of it away.
Now, it’s time to get started. Instead of going through all the trial and error of what does and doesn’t work, why not jump on board with me and I’ll just show you everything I have learned about money. We went from paycheck to paycheck and then paid off $52k in 7 months. Let me show you the way to making money fun again!
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