Level 1 - Track Income & Expenses
You need to track all of your income and all of your expenses in a single location. Check the Resources page for a free template to get started. Before moving on to Level 2, make sure you can answer the following questions:
How much income do you make each month?
What are your total expenses each month?
Level 2 - Establish Budget
Once you have all your income and expenses identified you need to balance them. Using the Budget Tracker on the Resources page, you can calculate the percentage if your income going to each expense category. Once your total income is greater than your total expenses. You can move on to Level 3.
My personal goal is to set my expenses to 95% of my income. That allows for the ability to save for large purchases and creates room in case you accidently overspend.
Level 3 - Fully Funded Emergency Fund
You have an established budget. Your income is covering all of your expenses. Now it is time to save up an emergency fund. This fund will cover you if you have unexpected costs or temporary loss of income. The general recommendation is to set our emergency fund to 3 to 6 months worth of expenses. This amount will vary based on your personal situation. Store these funds in an account that earns some interest.
Level 4 - Fund Retirement Accounts
Levels 1 through 3 set the foundation. They help you get your spending under control and create a safety net. Level 4 is where the wealth building starts. Its time to save for retirement. Here are two important accounts to have:
Employer Retirement Account (401k, 403b, etc.) - Make sure you put enough money in here each paycheck to earn the Employer Match.
Health Savings Account - This is an account that can be used for medical expenses, however, it becomes a retirement account once you reach 65 years old. It has a lot of tax advantages.
Level 5 - Additional Investing
Most people stop at Level 4. Content with working a single job until they are 65 and then living off whatever they have saved. Level 5 is how you accelerate your retirement timeline. Once you are earning your Employer Match and maxing out your HSA, its time to continue investing with any additional funds you have. (Remember, investing is part of your budget. Do not exceed 95% of your income.) Here are some common options for investing:
Roth IRA - This is an individual retirement account that you contribute to after taxes. Your contributions can be withdrawn at any time but your gains cannot be accessed until you are 59.5 years old.
Brokerage Account - There are no limits to how much you can invest into this account. Funds can be accessed at any time. Gains will be taxed.
Children Accounts - If you have children and would like you set them up for success. Consider funding a 529 Account (used for college expenses) or a UTMA (transfers to child when they become an adult)
Level 6 - Multiple Income Streams
You’ve done it! You are on a path to financial freedom. You’ve put in the work and time is growing those accounts every year. The only thing that can stop you now is losing your income stream. If you have a single job, you are always only one decision away from falling all the way back to Level 2.
Don’t let everything you built fall apart. Figure out additional income streams. That way, if one goes away, your income won’t drop to $0. Ideally, your streams of income will be equally weighted. For example, 5 income streams all earning the same amount of money would only cost you 20% of your income if it went away.