The Personal Finance Podcast - The Stairway to Wealth (Where to Put Your Money In Order!)

Episode Date: April 7, 2021

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On this episode of the personal finance podcast, we're going to talk about the stairway to wealth. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the personal finance podcast, we're going to talk about the stairway to wealth. If you have any questions about this episode, follow me on Instagram at Dollar A-F-E-F-A-F. T-R-dollar. You can ask any questions you want. Hit me up in the DMs. Hit me up in the comments. And I'll answer any question that you may have. Now, the stairway to wealth. What is the stairway to wealth? I created this system, the stairway to wealth, so people can understand

what order they need to accomplish their money goals. So what a lot of people have trouble with is, hey, where do I put my money first? How do I start out actually building wealth? What order should I actually start to build wealth? Should I be investing first? Should I be paying down debt first? Should I be paying down my home first? What should I do to build wealth? And this is a very important question to understand. Because as I've said a million times before, personal finance is extremely personal. But there is a strong systematic way to do this where you can figure out, hey, this is what do I need to attack first? This is how I need to set myself up financially to have a good system in place so that I can actually build true wealth in the most efficient way possible.

In addition, it also gives you just a roadmap to follow. So I created the stairway to wealth. The stairway to wealth is the way that if you follow these steps, you will absolutely be on the path to wealth. You will absolutely be able to build riches for your family for a long period of time, well into the future. But you have to follow the steps, and you have to do them in a way that allows you to build that wealth.

So without further ado, let's get into the stairway to wealth. So as I stated on the top of the show, the stairway to wealth is these steps that you can follow in order to be able to start building wealth for yourself. It's to take the guesswork completely out. What the heck should I be doing with my money now? And to kick it off, the first thing you should do, the first step to start building wealth is you need to build some sort of an emergency fund. Now, I've talked about emergency funds a number of times on this podcast. but an emergency fund is something that is going to save you many times within the future. Because it's not if an emergency is going to happen.

It's when is an emergency going to happen? Is your car going to break down? Is your house going to need repair? Are you going to have medical issues down the line? All of these things are utilized for your emergency fund. And the emergency fund gives you power with your money. It gives you a safety net so that you don't lose more money down the line. See, people without an emergency fund can't take advantage of certain situations like if they have to move for a job.

Some people who don't have an emergency fund who don't have the funds to make a move can to take advantage of a great opportunity that is sitting right in front of them because they don't have the funds to be able to move. But in addition, an emergency fund saves you when situations go awry. Because as you're trying to build wealth, if you don't have an emergency fund, you're going to have to be pulling from, say, your 401k or your wealth building activities to be able to fund. emergencies and that's exactly what you do not want to do. So that's why an emergency fund is so important to have. It builds an extreme buffer against life. And we all know life is messy. So having a buffer against life makes you bulletproof with your finances. It makes you absolutely impenetrable with your finances. And that's what's extremely important here. Set your finances up with some armor. Give your finances a shield and allow yourself to truly have a huge advantage over

everybody else who doesn't have one because having that emergency fund is a true advantage and that's why it's the first thing you need to do now how big should your emergency fund be we've talked about this a number of times as well we had an entire episode on emergency funds but it's very personal for each person but at a minimum at a minimum you should start with at least racking up a thousand dollar emergency fund if you're just getting started but at a minimum you need to have at least three months expenses in an emergency fund why because if you lose a job three months will at least cover you for three months Now, I truly believe that three months is not enough time to find a job in some situations. Let's say, for example, we hit with COVID.

The beginning of COVID, it would be very difficult to find a job within three months. Now, a lot of people probably did it. But at the same time, you want to give yourself that extra cushion. So start with the three months and then build it up from there because you want to start hitting these next activities and allowing yourself to start building true, true wealth. The next thing you want to do is you want to get your employers 401K. match. So if you're not familiar with the 401k, your job may offer it, your job may not offer it, but a lot of corporate jobs offer a 401k. And what those corporate jobs will do is to incentivize you

to invest in a 401k, which is a retirement vehicle, they will ask you, they will say, hey, every dollar up to a certain percentage of your salary, I will match. So let's say it's 3%. They will match your salary up to 3% if you put in 3%. That means 6% of your salary is going in and 3% of it is free money. The reason why you want to do this is because it's free money. You absolutely should do this at the 100% mark of what your match is. So if your match is 5%, you'd put 5% into your 401k. If your match is 6%, you need to put 6% in your 401k.

If your match is 20%, you need to put 20% in your 401k. Because you're absolutely losing out on free money if you don't do that. Do you like free money? Because I really like free money. And that's what you need to be taking advantage of. That's why this is at the top of the investing list. And this is even before paying down. which we'll be what we'll talk about in a second because you're getting free money a hundred percent

return on your money there's no better return on your money than 100 percent boom right off the bat and then after that money's invested think about that you're going to be getting double triple baggers over the course of time because your money is 100 percent invested at the front end and the 401k match is just it's extremely easy math so if you assume you make a hundred thousand dollars a year i'm making the math easy for myself and your employer will will 100% match your contribution up to 5%. That means if you contribute $5,000 a year, then your employer will put an additional $5,000 into your 401k.

It's simple. It's free money. You absolutely have to take advantage of it. That's why it's the second step after the emergency fund, which will save your butt in any situation. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be.

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I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IG Private Wealth.com. Step three. Now it's time to pay off debt. Now specifically what I'm talking about is credit card debt, loans, like student loans, or any other high interest debt. You don't have to count your mortgage in this step. So I'm not saying pay off your house in this step. Reason why is mortgages have much lower interest rates than a lot of other debt does. So for example, a lot of student loans will have like a 7% interest rate, a 6% interest rate, a 5% interest rate. And at the same time, student loans are just a

liability. The same thing goes for credit card debt. If you have credit card debt, you could be paying 14, 16, 18, 20% on your credit card debt. That absolutely needs to be paid down. That's a pants-on-fire emergency. So that's why debt is at the front load here because you need to get rid of that debt in order to build wealth. Because imagine what you could do if that debt was gone. Imagine what you could do with that extra capital where you could deploy that capital so it can grow for you and your family. That's what the importance of paying off this debt is. Debt is an emergency, especially when it's a student loan debt or credit card debt. You got to get rid of it because the extra payments that you could have

could reap to be millions of dollars within 30 years. If you're paying $400 a month in debt, that's a million dollars over the course of 30 years if you invested in an index fund and an 8% return. That's fascinating. And so to be able to pay off that debt and get yourself on track towards a million dollars is absolutely catapult towards building well.

Now, if you have to be able to pay off that debt, haven't heard our episode on how to pay down debt with the debt wrecking ball method, you need to go listen to that episode. Because what it'll teach you is the fastest way to pay down debt. And if you have student loan debt, we have another episode talking about how to pay down student loan debt. It's extremely important. And once you hit this phase and you get rid of those debts, those major liabilities

on your balance sheet, outside of your mortgage, then you are truly going to catapult yourself towards building wealth. The next step, step four, is to open up a Roth IRA and start contributing to it. Now, a Roth IRA is a retirement account, and it's the opposite of a 401K. So the Roth IRA, you get taxed on the money that you put in. So it's after tax money that you're putting in, but then the money grows tax free, and then you can take the money out without having to pay taxes. So the growth, and once you take the money out when you retire, both of those two pieces,

are not taxed. So the beauty of the Roth IRA is that you can allow your money to grow, which is the major portion of investing. If you're investing your money as you should be every single month, if you're investing money every single month consistently, then the majority of your investments will be coming from compound interest, which means the growth is the majority. And you can see these charts that we do all the time. I put them on Instagram all the time of these charts where you're contributing, say, a million dollars, you get a million dollars. And the amounts you contributed was like $250,000, $25%, so 75% of that million dollars is going to be coming out tax-free. That's extremely powerful.

That is how you build real wealth because Uncle Sam is not taking your money when it's a significant portion like this. Now the downside of the Roth IRA is there is income limits and if you make too much money, then we're going to have an episode coming up on how to do a backdoor Roth IRA. I promised a number of people who have had questions about a backdoor Roth IRA that I will do an episode on that. I promise you I will. And we will absolutely have that coming up. But you can put $6,000 a year into a Roth IRA. That's the max that you can put in. As I'm recording this episode, it goes up pretty much every year, especially in the past couple of years. So you want to make sure

that you're maxing that bad boy out if you can. You don't have to max it out to have a Roth IRA. Some people have had that question, but you absolutely should try to max it out next. Now, on step five, after you've maxed out your Roth IRA, you've done the other steps and you maxed out your Roth IRA, then you want to go back to your 401K. Remember we talked about the 401k at the front end to get your employer's match? Then you want to go back to your 401k and start maxing that out because that is tax advantage, the opposite way of a Roth IRA. So you don't have to pay taxes on the money going into a 401k, but you have to pay taxes when you pull the money out when you're retired. Now you can't pull the money out until you're 59 and a half,

but when you pull the money out, then you have to pay taxes. Now the advantage of pulling it out when you're retired is your taxable income is going to be lower, especially if you're a high earner. Well, if you're retired, you're not working, so you're not making a lot of money. So all of a sudden, your tax bracket drops. And when you're pulling the money out, then you're actually getting taxed less than you while you were working. So that's why it's important to use the 401K as a vehicle for retirement because that taxable value is lower when you're retired.

But you still get rate tax advantages. I just like the IRA tax advantages more. That's why it goes ahead of the 401K, except when you're getting. your employers match. Now the next step, step six, is to open an HSA and start maxing out your HSA. Now HSAs are incredible. We had an entire episode on the power of an HSA. Let me explain to you what a HSA is. It's a health savings account. This is the quick and easy way to understand it. It's a health savings account. This has triple tax power. You don't pay taxes going in. Your money can grow tax free and you can take your money out tax free as long as you have a qualified

to go with it. Let's say, for example, that you have a doctor, you're 30 years old and you have a doctor visit. Well, what you can do is you can save that receipt until you're retired. And so what you're doing is every single year, every time you go to the doctor or let's say you have a baby or your kids get sick, all these different things. You save all these receipts. And then down the line, as you retire, you can reimburse yourself later. See, there's no rule that your receipt has to be within a certain amount of time frame. So you can have receipts 30 years ago and get reimbursed tax-free through an HSA. That's the triple tax power of an HSA. If you really want to learn about an HSA, we have an entire episode about it, then I go into great detail of the power of the HSA, which I call

the super retirement account. And I think that's what the episode is called. It's called the super retirement account. Because one of the best ways to save money tax-free. It's an incredible account. And so absolutely funding an HSA would be amazing, amazing for you. your financial future in wealth building abilities. And then number seven, if you have extra money left over, then you can open up a brokerage account and start investing there. And that is where you can start building wealth in your brokerage account as well. So in order to max out a Roth, you have to have $6,000 to max out the Roth.

To max out the 401k is $19,500 at the time I'm recording this. And then to max out an HSA, it's $3,600 for one person or $7,000. $7,200 for a family. So that's a lot of money to be saving each and every year. But a lot of people can do it. If you're a high earner, you can absolutely do it. And at the same time, if you have a spouse, you can be doing this twice for the Roth IRA and twice for the 401K.

So you have significant cushion there. But if you're a high earner and you max out all of these accounts and you still want to continue investing, then open up a standard taxable brokerage account. You could do it from anywhere. Fidelity, vanguard, it doesn't matter where it's from. And you can start investing there. What do I invest in? Well, if you listen to the last episode, my main investment vehicle for my retirement accounts

and in my brokerage accounts is index funds. Now, I like VTSAX or the total stock market index fund. I also like the S&P 500 index fund. You can Google those. They come right up or listen to the index fund episode we had last episode. Those are fantastic investment vehicles. That's how I invest within these accounts. Now, as you get more advanced, you can start investing in other investment vehicles like real estate.

I love real estate. but you have to understand what you're doing to invest in real estate. That's why for most people, until they have an understanding of what they're doing, this is the way to go. Following these steps will absolutely provide you and your family with a tremendous amount of wealth going forward. Because you're getting rid of your debt, you're putting yourself up in a situation where you can take on any bad situation

that comes at you with an emergency fund, you're getting free money by getting your employer match, and you're thinking towards retirement with your, your 401k, your Roth IRA, your HSA, and then allowing yourself to invest in a brokerage as well. All of these steps are the way to go. If you're trying to figure out, hey, I've got this chunk of money. What do I do with it first? After you hit each of these steps, this is the way to go.

This is the way to build true wealth. This is why I set up this system so that you know exactly where to put your money and how you want to invest your money. Can you tweak the system? Absolutely. If paying down your house is important to you, maybe it's not the most efficient. efficient thing in the world, but if it makes you feel better to have your house paid off, it just takes stress off you, you sleep better at night, then add in paying off your house early

on the front end. There's no right or wrong answer here. But what I've set up here is the most efficient system for you to get the most tax advantages and see the most growth within your portfolio, especially for most people. Now, if you have a big understanding in different things, maybe you have a really strong understanding of buying out businesses, for example. Well, maybe your money would be better served buying businesses than putting it into a 401k. That might be something that would be situationally better for you. But for most people who just want to have passive income, they want to build true wealth, this is the system that'll work perfectly for them.

If you have any questions about this episode, hit me up on Instagram at Dollar A-F-T-R-Dolar. And please don't forget to leave a five-star review on Apple Podcasts because that is what truly will help out the show. show. Again, thank you guys so much for listening and I will see you on the next episode. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode and share this episode with a friend. And don't forget to leave a rating and review on iTunes as well because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do is to buy more freedom. So thank you again so much for listening and I hope you have a great day.

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