When someone says fire is your first instinct to run for the door? To be honest, I think that I’m at the point now where I’m ready to talk about my Roth IRA and some of my wealth creation strategies…
For those of you that might be unfamiliar, FIRE, to some people, stands for Financial Independence Retire Early. In other words, its people working towards the common goal of financial autonomy. Wealth creation strategies are exactly that – it’s finding ways for you to create long-term wealth for you and your family.
In general, at a very high-level, I agree with many of the lessons that Dave Ramsey teaches, especially for the person that is very new to taking control of their money. The more in the weeds we get, the further that my views align with Ramsey’s, but one thing that I will never disagree with him on is this quote:
“Live like no one else now, so later you can live like no one else.”
I just love that quote so much. Essentially what he is saying that if you bust your ass right now then in the future you can reap the benefits. If you work super hard to set yourself up for financial autonomy, then you can coast better in life. I think that’s so incredibly motivating. So how do you do that exactly?
By defining your wealth creation strategies.
So, what exactly are wealth creation strategies? The Financial Dictionary defines them as an accumulation of assets (especially those that generate income) over a long period of time.
So, if I had to break it down into my own categories, I think it would be in the following five categories:
- Reducing Debt
- Increasing Active Income
- Increasing Passive Income
- Reaching for Financial Autonomy
- Life After Death
This one is simple – pay off your debt! Boom. Next, right? Wrong!
This might seem simple, but there’s a reason that I have it listed as #1.
Per debt.org, the following age ranges have the following amounts of debt associated with them:
Can you imagine hitting 65 and being ready to retire but still owing $66K in debt? I can’t. That’s freaking awful. So, how do you get out of debt? Well, step 1 is to take control of your spending. You have to get an idea of how much you’re spending and then decrease it.
I guarantee that you’re spending much more than you thought you were. It’s so easy to let small purchases go unnoticed unless you’re actively tracking them.
If you’re not tracking them, you need to. You need to start a budget promptly if you really want to get going on this journey.
Throughout my financial journey I have spent a ton of time creating, editing and updating a spreadsheet to make it the most efficient tool that I can, and I finally decided that I want to share it with anyone else that is looking to get on a budget (that actually works) and to get them out of debt. I can tell you from experience that it worked for me and I know if will work for you as well. All you need to do is get your expenses and then Doctor Budget will do the rest for you!
Once you do that you can see how much you’re spending vs. your income. The next step is to pay down any debt that you might have that’s at a high interest rate. In my eyes, I view “high” as anything over 6%.
“But Andy, my debt is all under 6% interest – what do I do now?”
First, that’s good. Second, I’ll tell you later ?
Increase Active Income
This is the fun one! I love making more of that sweet, sweet ca$h. So, how can you make more money?
- Main Job
- Work more hours at your job
- Work harder and get promoted at your job
- Make a case why you deserve a raise – don’t just ask for one
- Get a second job
- Drive Uber/Lyft
- Find your special skill and use it
- Teach and Tutor
- Plow Driveways
- Buy items for cheap and resell them
- Literally just get a second job somewhere
- Start your own business!
- Go be an entrepreneur. If you need help getting motivated on this one just goes watch an episode of Shark Tank. You’ll get there.
- Ok – two quick side notes where I might lose you, but I think are funny…
- I am constantly having “Shark Tank” ideas that continuously are ideas of things that are already invented lol. My only one that I have that isn’t is a baby stroller that also is a golf bag cart…nothing like golfing with your little one! Good idea? No? Yeah, I’m leaning no…
- Every time I hear the word ‘entrepreneur’ I flash back to college when we’d yell ‘ENT…TRE…PRE…NEUR” in the “They took our jobs” south park voice…yeah, our teachers hated us…
There are so many different ways to do this that I wanted to stop here before I had a billion examples. The fact of it all is that you have endless opportunities in a world that’s so heavily reliant on the internet. Take the initiative and reach out to someone that is doing something that you believe in and ask if they need help.
Show someone a way that you can help improve their business. Take the bull by the freaking horns and get the damn thing done!
The only person keeping you from making your money is yourself. You can only reduce your expenses so much but the amount of money that you can make is literally indescribable. If you want it, go get it. If you don’t then keep watching 4 hours of tv every night and tell me that you don’t have time.
Increasing Passive Income
Passive income and active income can definitely have some overlap depending on your usage, but it’s very important to identify the difference. If you’re driving Lyft 10 hours each week then that’s active income. If you’re only driving when you want some beer money, then you guessed it – passive income.
The key is to understand the intention and the repeatability of the action. Passive income could be doing one-off jobs like helping someone move, looking for a short-term project on Craigslist, making a piece of furniture and then selling it, delivering Grubhub, taking dogs on walks, really anything.
These might seem farfetched, but I truly cannot stress the importance of having some sort of secondary income, whether it is passive or active.
Now, a little bit more sophisticated passive income is real estate investing. By no means am I real estate investing expert as I don’t own any properties, but I know a lot of people highly recommend it as a stable, secondary income stream.
In a sense, it’s almost like a monthly dividend with the rent payments.
Now, unlike a stock, the heater can break and your tenants might need to be evicted (I guess sometimes we do evict our stocks lol), so that’s something that you need to take into consideration, but real estate is a way to allow you to build some steady income streams and also accumulate wealth through the property value of the rentals that you’re acquiring.
If I had to summarize these last two sections into one, it’s simple – take your free time and turn it into money time. You have time to make more money if you want to.
Reaching for FI
Once you’ve gotten to a point where you’re no longer having to focus on budgeting and reversing the trend of spending more than you’re earning, you can finally start to reach for financial independence! Honestly, I think that this is the easiest step by far.
At this point in your journey you’re so motivated and focused on saving money that it’s legitimately addicting. Putting money in every month and investing it into the market becomes a bordering unhealthy habit.
For perspective, when I first was really getting going in my investing journey, I was so addicted to making my life as efficient as possible that I tried to plan my budget to the exact dollar and then invest all of the rest and at times it would cause me to almost overdraft my account lol.
I hate having extra money in my checking account because it’s not earning any interest so it’s literally just sitting there. But sometimes it’s better to have some peace of mind than it is to be 100%+ optimized.
So, you’re saving more than you’re earning and you want to get ready for FI – what do you do now? Well, simple!
First and foremost, max out your employer max if you have a 401K. To be honest, this absolutely should be done before even making any sort of extra debt payments.
I almost said left out the word ‘extra’ there because you could make a legitimate argument that you should max out the 401K before paying for your car payment, but that’s a really, really fine line, and while mathematically that is true, I can’t advise someone to not pay their car loan and eventually get their credit messed up and there care repossessed. Sometimes, there is more than just the numbers…a lesson that I have to teach myself every day.
But yes, max out that 401K match. You’re getting free money right off the bat. If you make $50k/year, and your employer matches 100% of 4%, that means if you put in $2000 then they will also put in $2000. Do you know what $2000 would be worth in 40 years at an 8% return?
So, you paid $2000 to make $87K when you retire. That’s a no brainer.
Next, match out any other tax-advantaged retirement accounts like an IRA. When looking at an IRA you have two options, either Traditional or Roth, and both have great advantages. The limit for these in 2020 is $6000, so definitely try to hit that.
A HSA also falls into this bucket for me because it’s very similar as it’s tax advantaged and then allows for you to withdraw at age 65 for any reason you want – so it covers you for medical purposes and then you can claim the remaining funds at the end, penalty free.
I’m going to throw the 529 in this bucket too because if you’re planning to pay for your kids’ college or further education then this is going to be very important to plan for. The main point here is to take advantage of all tax programs that are available to you.
Life After Death
The best thing that I think we can do for people is to set others up for success. In my eyes, that means leaving a lasting legacy by improving the lives of others after we are gone. Step 1 is taking care of our own family. You can do that with life insurance for when your unfortunate time comes, and guess what, financial gurus literally love short-term life insurance.
You also can do the simple things like opening 529 accounts for grandchildren (or even just contributing to ones that your kids have for their kids), buying stocks for your grandchildren for them to access when they’re old enough, or literally anything else.
But even more important than helping them financially is to help them educationally. So many people, and even very, very smart people, have no idea about the stock market or how it works or anything like that. It absolutely blows my mind and it’s truly sad.
I think that for those of us that are taking the bull by the horns to learn about these wealth creation strategies, it is our duty to teach others about it. And I mean that sincerely – it is literally our duty to do this.
If you care about someone, you should make them aware of all of these tools that are available to them. I know people that make much more money than me that have literally no savings whatsoever and it’s just depressing. People get so caught up with the lifestyle creep and trying to keep up with the Jones’ that they lose sight of what’s really important to them.
If a big house is all that you need to be happy then fine, buy a big house. But if you don’t care about a big house, why’re you house poor? It’s imperative that we all find what is the true root of our happiness and we work towards that. It’s truly not too hard – reduce your debt, increase your passive income, reach for FI and then plan for life after death – that’s it.
If you can follow these steps, you’re going to be setup very well for the future – I assure you of that.