If this pandemic has taught us nothing else, it has taught us the importance of reducing our debt burden and building up an emergency fund-- two tasks that seem impossible to many Americans. I'm here to tell you it can be done, although it will take some time and sacrifice to do. It's all about you though and your willingness to change your habits.
Photo Credit: JP Valery
Let me tell you a quick story. I was in Atlanta a little over a month ago, pre-pandemic of course, and my friends and I were sitting around a fire pit outside a restaurant in Alpharetta. Because it was an unseasonably cold night, a family asked if they could join us and share the heat (again pre-pandemic, this never would have happened in our social distancing world now). We said yes and got to chatting. The little girl was excited to tell us all about the pageant she was competing in the next day. She described her turquoise dress with Swarovski crystals, and a whopping price tag of $1000 to go with it (odd a 5-year-old would know this detail). The mom then went on to talk about the renovations in their home that were underway and how they now needed to add a gas fire pit like the one we currently hovered over as we spoke. By the end of the conversation it was clear dad was beyond broke, exhausted from working to pay for all these luxuries, but considered them to be necessities, and would continue to find ways fund these sorts of things because he believed that was what a good father does to 'provide' for their family.
I share this to say we all have been programmed to be consumers in our society. It has been normalized, even celebrated, to buy, buy, buy. We are advertised to overtly as well as subversively each and every day. We are taught that things will make us happy and the "American Dream" is to own lots of houses, fancy cars and wear designer brands. It's not our fault we think this way because we have been indoctrinated with this mindset for many, many years. However, that mindset will have to change. But if you are ready, which I think you are because you are reading this, we're here with full proof plan to go about getting rid of your debt and building up your safety net, even during these scary times.
Photo Credit: Jacek Dylag
With that being said, this is awesome! I'm glad to hear you are looking to take control of yourself and your future financially. That is a pivotal moment that not everyone reaches so you should definitely first celebrate yourself and look at this as the first step in a very long and rewarding journey.
Next up it's time to figure out a plan to reach your goal of being debt-free. You might not be sure what to do first. Different experts tell you different things. You listen to one podcast and they tell you to pay off all your debt first, you listen to another and they say that is a terrible idea and that you should be investing AND paying down your debt simultaneously. One guru tells you to invest in stocks, ETFs to be exact, another swears by real estate...commercial real estate only. It gets confusing. You can end up being the rope in a giant game of tug-a-war that begins to fray. Don't fret though. Again, the most important thing you've already done is decide that you need to do something.
Photo Credit: Danielle Macinnes
When you get to this place, which we all do, I want you to remember something: there is no wrong steps on your journey.
Read that again. There is NO WRONG STEPS ON YOUR JOURNEY.
No matter what choice you make, or how you decide to build wealth, it will turn out how it's meant to be for you. There will always be other options that you could have, would have, should have. And you can speculate how much more (or less) you could have earned if you invested in this over that. But honestly, all that is a waste of mental energy that will only zap your motivation. And furthermore, it's all hypothetical. You will never have all the information you need at the time you have to make a choice to know every which way it will turn out. That's just not possible.
Photo Credit: Pablo Garcia-Saldan
So get over the idea of there is a "right" and a "wrong" way to get started. That is a myth. There is only one way-- your way-- and you will figure it out as you go based on what you learn along the way. Your ideas will shift, they will evolve. Your plan may backfire at times. There may be unexpected wins but it will unfold as it will unfold as long as you take continuous steps in the right direction. And there are very clear indicators that tell you what the right direction is: Pay down debt, invest, live below your means. Whatever combination of those three things you do, you will eventually get there.
With that being said, I know some people don't do well with gray areas (despite the fact that that is all life is, one big grey area!) So people have asked me what I have done and what my plan is. I'm happy to share it but of course I'll share it with the caveat that my plan may not be what's just right for you. It is based on where I started, what my level of risk aversion is, and what I currently know at this given moment. It also is based on my own goals and values and how I want to live my life. Those ingredients may be very different for you, thus altering the recipe would be a necessity.
But here is what I did so far, and where I plan to go:
Step 1: Max out your 401k
Do it. Even if you don't think you have enough. Max it out and live on less. You will then never know the difference. It will become the norm. If your paycheck is teeny tiny after that, good. It will motivate you to get those pay raises, move up the ladder or at the very least get some side hustle action going on. The best part is it will lower your taxable income rate (yay!) and give you extra time to accumulate interest (yay!). The longer your 401k does that, the better off you will be in the long run.
Photo Credit: Austin Distel
Step 2: Never get into credit card debt or if you have, pay that off first.
Some people already are in deep with their credit card debt and it's okay. You can't go back and change the past. Accept where you are starting from right now and work from there. Pay it off because it is usually carries the highest interest rates of all your debts, which is what causes people to be trapped in a vicious cycle. Pay as much as you can each month on the card with the highest interest rate and don't. charge. more. Keep paying aggressively until it is all gone. Never pay just the minimum if you can avoid it because they set it at a very small number that has you just covering the interest and not really chipping away at the principal. That is how they get you trapped! They are tricky. Don't let them get away with it on you!
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Step 3: Pay down student loan debts
Why? They never go away. That's right. If you file bankruptcy those student loan debts stay with you...forever! Talk about "ride or die." Plus, for me, my interest rates weren't super low to begin with. If I remember correctly some were at like 7% or more. So it made sense for me to start with the loan with the highest interest rate first and pay it off aggressively. Then I'd move on to the next highest student loan, and pay it off aggressively. And I'd keep doing this until they were all gone. Again, I never deferred, even when in school, and I always paid as much as I could on the balances so I more than covered the interest and then made a dent in the principal. Did this require sacrifice? Yes. I chose paying back aggressively over designer clothes and cute accessories. Did it suck at the time? Yep. Do I appreciate it now? Hell yeah!
Step 3: Build emergency fund
I used to roll my eyes at this one. When people said to save a minimum of 6th months worth of expenses I thought it was not only unreasonable, but stupid not to have that money working for you. Thank goodness my thinking matured in this arena. Now, I think the pandemic has taught everyone not to underestimate the beauty of your own emergency fund. It just helps you to sleep better at night, which is priceless this day and age. You have to decide how much you want to save up though. For some people 6th months feels right. For some people it's more. Either way, figure out what that number is and never drop below it incase you need to pull money out from it in an actual emergency! And just in case you were wondering, buying a new car is not an emergency. Paying rent on a vacant rental during a pandemic, is an emergency. As soon as you have the means, fill it back up to capacity. It is imperative that you create your own safety net after you have paid off your credit card debt and student loan debt.
Photo Credit: Alexander Mils
Step 4: Decide how your extra money will be invested.
This may seem impossible for some of you, but you will get to this point. Trust me. It may take a year, it may take many years but if you go in this order there will be a time now where you will now have enough income that you will have to decide what to do with the remainder of your money.
Here is where you really have a lot more options open up:
buy a home
buy real estate for investment purposes
invest even more in the stock market (maybe IRA's if your income isn't too high)
pay off your mortgage
start a business
invest in tax liens
invest in bonds
At this point the choice is really dependent upon what your next personal goals are. But whatever you choose to do, if you maintain this solid financial foundation and continue building off it, your net worth will continue to grow and you will soon cross into financial independence (when your income surpasses how much money you need to live each month).
Consider paying off debt like a video game. Set goals, chart your progress, make it fun and celebrate each time your reach a milestone (by having a nice dinner, not buying a Mercedes) and you will find that most other areas of your life will come together as well. Financial health is mental health. There is no better self care than living within your means and consuming less. You will begin to realize that a lot of the "necessities" aren't really "necessities" and didn't bring you as much joy as you thought they were. You will get to a point where you will get more satisfaction from saving and investing. That is when you know you have made it!