Building Wealth: Part 1
Building Wealth. Those two words can be intimidating but when it comes down to it, it shouldn’t intimidate any of us. It should excite us. In my last blog post we ended with the question, “how and when does wealth become a financial goal and not just a pie in the sky aspiration to achieve “one day?”. Below I hope to give you solid steps to begin your journey.
What do you need to do before you begin the building wealth conversation?
Well for one...you can’t be in consumer debt and simultaneously build wealth.
You’re kind of robbing Peter to pay Paul at that point and it doesn’t make much sense. So you have to take care of yourself first. It’s kind of like the airplane rules. Give yourself oxygen before you give someone else oxygen so you are in a position to help.
First Steps in Building Wealth
Let’s talk about how to get there because I think most people have the aspiration to build wealth but may not know the steps to get there. These are Dave Ramsey’s Baby Steps that we went through as a family. They are also laid out in his book called, Total Money Makeover.
$1000 emergency fund. Yes, $1000. This is an important first step because it’s for an emergency. An Emergency fund is for…wait for it....an emergency. This could be getting in a minor car accident, an unexpected hospital visit, etc. Now, a lot of people will argue this baby step in one of two ways.
The first way is to just ignore it...I mean you haven’t had an emergency fund ever and you get excited about getting out of debt so you just pay that extra couple hundred dollars towards debt and just hope and pray that an unexpected emergency doesn’t happen.
The problem with that is, is that something is going to happen. A kid will get sick, you will get sick, a tire is flat, your water main blows, etc. So when not if, these happen if you don’t have an emergency fund...guess what happens? All the debt you’ve been paying off on that credit card is kind of null and void because you have no savings to cover those new tires or whatever so you put them on the credit card. That’s the crazy cycle you don’t want to be on. Talk about discouraging.
BUT if you have that $1,000 on the side and you work like crazy to pay off your debt AND then if something comes up, you take $400, or whatever, out of your emergency fund and you go back and refill that $400 as fast as you can and NO STRESS.
I was talking to a girl who had a goal to build her emergency fund. Her goal was to be at $500 by the end of December 2019. I followed up with her asking how it went and if she hit her goal. She said, actually we almost got to $1,000 but then her car needed new tires and one other thing popped up and she just said, “freakin life man…” but I was so proud! For one, you doubled your goal. Talk about getting it done. And second, that seems like a setback because you almost had it and then life happened but actually it’s a win!!
How amazing does it feel to need $400 (or whatever it was) in new tires and be like, “Here ya go!” I mean sure it dipped your savings but you at least HAD it. That’s a much different feeling than just adding it to the credit card and ultimately paying interest. You needed $400 worth of tires and you paid $400, not $450 after interest added on the credit card.
My point is, having savings is a way to feel like you are winning with money early on in this process. You get that shot of dopamine even when you have a set back which helps keep you determined and on track
The second way to look at the Emergency Fund is to not believe $1000 is enough and want to keep $2000, $5000, or even $10,000 in your savings.
So here’s the deal, $1000 is absolutely not enough. That is not an adequate emergency fund. Not in the least. This is just a starter emergency fund that acts as a “good enough” safety net for you while you get to work on your debt.
An adequate savings is 3-6 months, this we will talk about in Baby Step 3. That variation is because it depends on your situation. If you are a family living off of one income then you are going to want that 6-month cushion. If you are both making an income then 3-4 months may be adequate because if someone lost their job you would still have an income to scrape by with. If you are a single mom/dad then 6 months is probably ideal - but that’s a personal decision.
But here’s the fun/rewarding part (I may be a nerd for calling this fun but it gets me excited). If you sat and added up all your payments right now, Mortgage, utilities, payments due on debt you have, the costs to run your household, etc., you may have $3k a month going out in payments alone.
That means you would need $9000 for 3-months worth of savings. But think about if you had NO consumer debt (this doesn’t include your mortgage), the amount going out would be dramatically less.
Let's say $2000, so then your 3-month savings is only $6000 instead of $9000, so your money goes farther. If you have a lot of extra savings now but are saddled with consumer debt, how freeing on your wealth-building journey would it be to use that savings to knock off 1/3rd of your monthly financial obligations in one shot?
Ok, so once you have your emergency fund...now what? Now you begin your Debt Snowball. Your debt snowball is set up like this. You list out all of your debts (outside of your mortgage) in order from smallest to largest according to their balance.
Once you have your debts (outside of your mortgage and stuff in collections) listed smallest to largest according to their balance you will just start attacking the smallest one. Every spare penny goes towards that balance. You will still pay on the other debts, you will just pay their minimum payments throughout the month and nothing more.
For example, if you had a debt that had a $25 minimum payment and you were paying $100 every month and it’s not the smallest debt and the one you are attacking. Then you are going to drop that payment back down to $25 a month until it’s time to attack that specific debt. This is designed this way for a couple of reasons.
- It’s much less overwhelming to give some order to the chaos of everything that is due and when you have a plan.
- It’s so you can have some quick wins. If you are staring down the barrel of a $90,000 student loan debt on top of a million little things, then that’s going to be daunting. But if you are staring at an $800, $1500, or even $3000 bill, then with a budget, laser focus, and some sacrifices on your frivolous spending you can eliminate that fairly quickly.
- The Debt Snowball is set up so that once the smallest loan is paid off you can now take that previous minimum payment and put it towards the next loan’s payment and it ultimately begins to compound as you make your way through your debt. Hence, the name, Snowball. ot gains momentum so that when you finally do come head to head with the major loan at the end you have some serious cash to throw at it in big chunks instead of nickel and dime it for the next 30 years.
So once you finish up your Debt Snowball, you are going to want to look at those loans in collections and deal with it as I talked about earlier.
So now what?
Once you’ve paid off your consumer debt...now is the time to start your 3-6 months saving. Like I said in the beginning, this is kind of up to you and your circumstances. But now you get to add up all the payments you have left, which should be a much more reasonable number now that all of your consumer debt is gone, and multiply that by 3, 4, 5, or 6 months. In this stage, you have your debt snowball that has gained momentum so I would just roll that snowball right on over to savings now. How fun is it to pay yourself big chunks of your hard-earned money in the form of savings instead of paying everyone else? It’s a good feeling.
A quote that I really like says this,
“Those who buy what they do not need, steal from themselves.” -Unknown
How true is that? At this point, you are feeling like you have some money - and you do!! But the discipline you need to have here is continuing to save so you can pay for things in cash. You want a $1500 couch. Fine. But please don’t go finance it the second you get out of debt!!!! Save up and then pay cash for it once you can actually afford it! American consumerism tells us if you want it, you can have it (thanks to Ariana Grande) but true Financial Freedom is having the patience to buy things after you have the money for them, not buying them because you can afford the payments.
People have some issues with Dave Ramsey because if you are smart with money and can have the same as cash offer or get points for using a card and then paying it off monthly…..it’s free money so why not?
Here’s the problem. You didn’t, I didn’t, we didn’t get into the situation we JUST got out of because we had self-control with money. If you are at the point where you are out of consumer debt completely, sure you have had a mindset shift around money and are probably more responsible. But don’t fall right back into the payments and having credit cards just to “pay them off” monthly the second you get out of debt. Many people get out of debt and go right back into debt.
So, here’s the deal. Maybe once you are far removed from your debt and you have sustained a debt-free lifestyle then we can have that conversation but Dave Ramsey is mainly talking to people who struggle when it comes to being disciplined in their finances. If you keep the temptation of credit cards away for a while it’s probably best.
Actions steps to start taking today.
- Write down all your month's spending. I want you to layout your months spending and take a hard look at what is “Frivolous” and cut it out. The goal is to get to where you are spending on what you NEED and using the rest to dig out of the mountain of consumer debt.
What is frivolous? The things you do not NEED. You do not need cable bill nor do you need to have 5 streaming services. You do not NEED to spend $100 to $200 a month on LuLu Lemon or your other favorite name brand clothes nor on going out to eat multiple times a week.
You do not even NEED a car with a payment when you can buy a perfectly reliable one at auction for $1,500 (I know this is extreme but this is something we personally cut out on our debt journey and it was a game-changer). I know you like to look fabulous and who doesn’t? But you don’t NEED to get your nails done or hair done monthly.
These are all sacrifices you can make while being laser-focused on hitting your goal of becoming debt-free and building wealth. These are things that can be added back in, but in a healthy planned, and budgeted way once you have cleared your debt and are building wealth. This is a season of focus and growth, it takes grit and determination, but it is rewarding.
2. I want you to tell every dollar where you want it to go and then do that - for a month.
3. If you don’t have a $1,000 emergency fund then I want you to begin to start building that up this next month and move into your first loan in your debt snowball.
If you already have your $1000 then your job is to dial in your budget and start attacking that first loan in your snowball.
In my next blog post, Building Wealth Pt. 2, we will talk about retirement, college savings, and ultimately building wealth and giving abundantly. This is going to be exciting because I think everyone aspires to be able to get to this point. I am so excited to walk with you on this financial journey and help you find your grit while completely covering you in grace.
Did you know that there is a Facebook community built around continuing the conversations outside of my blog? Go to, The Legacy through Motherhood community with Stephanie Sims, to stay connected on a more personal level. Also, follow me on Instagram at Legacy_through_ motherhood. And remember, whatever goal you are crushing or whatever thing you are struggling with - you are already enough.