The Ultimate Guide to Getting Wealthy

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Financially providing for yourself and your loved ones is both a goal and challenge for most people. Trying to balance having enough money for today’s needs and planning for the future can be tough. And planning to retire with dignity is usually a top priority and concern. Unfortunately, most of us aren’t taught how to manage money responsibly and we’re left to our devices to figure it out – usually with poor results. That’s why this ultimate guide to getting wealthy was created.

This complete guide to getting wealthy talks through how to get out of debt, create a budget and afford large expenses like cars and your kids’ college. It also teaches you how to plan for your retirement. Last but not least, it also takes a look at the necessary attitude and habits you need to manage your money responsibly. You got this! Let’s go!

By sure to check out all the links in this guide – they point you to many great resources. It’s the ultimate financial link roundup.

This is an entry in my ‘Ultimate’ series that teaches you how to improve yourself in a balanced way in all your spheres – physical, mental, spiritual and financial. Be sure to also read:
* The Ultimate Guide to Getting Healthy
* The Ultimate Guide to Getting Happy
* The Ultimate Guide to Spirituality

Disclaimer: the information provided on this website does not, and is not intended to, constitute medical, legal or financial advice. Instead, all information, content, and materials available on this site are for general informational purposes only and are to be used at your own risk. View full disclaimer.

This ultimate guide to getting wealthy covers:

1. Understanding the overall strategy of getting wealthy

Before diving into the details of what to do to get wealthy, I’ll summarize our approach to make sure they align with your goals:

  • Live and spend below your means
  • Keep a budget
  • Save up an emergency fund
  • Have no debt
  • Invest into retirement funds
  • Save and invest for kids’ college and other general expenses
  • Spend, give and be generous

Pretty straight forward, right? This plan would allow most people to reach their financial goals. And it’d put you in a much better financial position than most people. Don’t believe me? Here are some startling facts:

2. Americans are broke

* 64% of Americans will retire broke (less than $10,000 saved for when they retire)
* Two-thirds of Americans would struggle to scrounge up $1,000 in an emergency
* Only 32% of Americans maintain a household budget
* 43% of Americans spend more than they receive each month and borrow and use credit cards to finance the shortfall
* 44% of American adults are relying on an auto loan to pay for their car

Pretty scary, right? I’d bet my right foot that the vast majority of them, if not all, aren’t managing their money responsibly and intentionally. But the great news is that you are managing your money wisely (or will be if you keep working through this plan)!

3. What if you’re broke?

What’s the difference between ‘broke’ and ‘poor’? Attitude. Both involve having lack of money. But being ‘poor’ is a mindset. Being ‘broke’ is only a temporary condition.

Poor people say, “I can’t afford it”. Broke people say, “How can I afford it?” and figure out a way.

Poor people blame others (the “Man”, the government, the “evil rich people“) for their woes. Broke people take responsibility for their actions and seek out opportunity.

It all starts with your attitude. Are you broke or poor?

Becoming wealthy is 80% attitude and 20% head knowledge.

If you’re poor, you need to work on your attitude.

If you’re broke, you need to work on your head knowledge.

This ultimate guide can help you with both.

All of that aside, I do want to let you know it gets easier. You may not think that if you can’t even scrounge gas money together to get to work or have to decide which bills will be late this month again.

It’s the hardest when it’s the hardest. Saving up your first ten dollars is the hardest. Once you do that and get some momentum, saving up a hundred is actually a little easier. Once you’re to that point, you’ve learned how to streamline things, tighten things up, sold some items. Now you’re onto saving up $1,000.

At a certain point, you’re out of crisis mode. Then you’re no longer just surviving but thriving. I’m not saying it’s easy to get there. I don’t mean to sound tone deaf. It may be hard but it is possible. I’ve done it. People are doing it everyday. You can do it too!

4. Dave Ramsey’s 7 Baby Steps – your path to wealth

Why should you trust this ultimate guide? Good question and smart of you to ask – you should never blindly trust anything or anyone, especially when it comes to your finances.

You should trust it because it incorporates the teachings of Dave Ramsey and his 7 Baby Steps.

If you’re not familiar, Dave Ramsey has taught millions of people how to get out of debt for over 25 years. His Baby Steps is a proven system to managing and succeeding with money. Some highlights of his qualifications and accomplishments:

His approach has helped millions of people get out of debt and go on to become what he calls “everyday millionaires”. Hardworking regular folks like you and me. It is possible!

5. About the author

Another reason why you should trust this guide is because I have done everything I ‘preach’ in this guide and so I know it works:

  • My wife and I are in our early forties.
  • We built our dream house.
  • We have no debt other than the mortgage.
  • We have a 6-month emergency fund.
  • We invest into retirement funds and are on track to retire at 59 and be “everyday millionaires”.

We’re just regular people

We weren’t born with silver spoons in our mouths. We didn’t get any inheritance. Our parents didn’t teach us anything about managing money.

We’re just regular people who decided early on in our relationship – nearly twenty years ago now (“honey, are we getting old??”) – that we didn’t want any financial stress in our lives, wanted to provide a good, fun, fulfilling life for us and our kids, retire with dignity and pass on an inheritance so that our kids would have more opportunities than we did.

And we’re living our financial dreams.

We’ve worked hard at it, been responsible and have a healthy attitude towards money – we’ve lived well below our means, haven’t fallen into consumerism and haven’t tried to “keep up with the Joneses“.

The biggest thing we’ve learned is that you need to be intentional with your money, have a plan for every dollar and simplify, simplify, simplify.

Moderation and balance

My wife and I are naturally wired to live a life of moderation and balance. So, we didn’t do anything extreme to gain financial freedom. We haven’t pinched pennies or lived a minimalist lifestyle.

We could both be worth a LOT more than we are if we’d go after the almighty dollar. But we’ve agreed we make enough money and have made a conscious decision to not chase the money by keep trying for raises and promotions. That’s given us a healthy work-life balance.

This also means we didn’t want to go the route of the FIRE movement (Financial Independence, Retire Early).

In a nutshell, we pretty much just learned what works through study and experience and didn’t do anything too dumb! Or course we’ve made mistakes. Bought two new cars around the same time (dumb for multiple reasons!). But we buckled down and paid them off early – $31,313 within 6 months to be exact – years ahead of time. Never again.

You can do it

I wanted to write the guide that I wish existed when I was first learning. Or the stuff that I wish my parents would have taught me (I don’t blame them at all – they didn’t know how to manage money because their parents never taught them either – financial illiteracy is a multi-generational epidemic).

Whatever your background, age, creed, race, religion or occupation – you can reach your financial goals. If we can do it, so can you!

6. Is this the best way to become wealthy?

With all of that said, do I think this ultimate guide is the best or only way to become wealthy? Of course not.

But I think it’s a general enough plan to help get the majority of Americans wealthy. It would surely help the tens of millions that are woefully unprepared for retirement and are considered financially illiterate.

But of course there are other ways to become wealthy that this guide does not cover. For example:

  • FIRE movementFinancial Independence, Retire Early.
  • Minimalist lifestyle – Live extremely under your means.
  • Business owner – selling it at retirement to be your nest egg.
  • Real estate – renting apartments, houses, condos. Commercial properties.
  • Inheritance – if you know you’ll receive a significant inheritance.
  • Inventions – invent something, make nest egg from selling products or the rights to the product.
  • Cryptocurrency – Bitcoin and others.

7. Defining your financial goals

The first step to getting wealthy is to define what ‘wealthy’ means to you. It’s rarely about having a certain amount of money in your bank account or having a yacht or Lamborghini. It’s more about providing for your family and being able to handle emergencies when they arise.

Think through what you want for yourself and your family now and in the future. It doesn’t matter if your goals seem far-fetched, if you don’t know exactly how much they’ll cost or if you don’t know how to get there. We’ll figure out if they’re achievable and how to get there as we work through this guide together.

Dream big for now. And talk it over with your partner if you have one.

Some things to think about:

  • What does being wealthy feel like to you? Not having financial stress? Not fighting about money anymore? Being proud of being able to provide for your family?
  • Any big purchases you know are coming up? A house? Car? Moving expenses? A wedding? College? Medical expenses?
  • Any hobbies or activities you’d like to have money for now and in retirement? Travel? Collectibles? Music lessons?
  • When would you like to retire? At 40 years old? 50? 60? 70? We’ll figure out later at what age you can afford to retire to see if your vision matches reality but dream away for now.

So, when I say “wealthy” in this guide, consider that short-hand for whatever financial goals you have.

8. Can money buy you happiness?

Can money buy you happiness? This can be controversial because people have strong opinions based on what they think the question means and implies. I would answer with a resounding “YES”… but let me explain.

Happiness isn’t the goal

Happiness is an emotion that’s fed by things outside of you. You get a new car, shirt, promotion at work. Those make you happy. Sometimes people start chasing happiness. They just got to keep buying stuff because happiness only lasts until the ‘newness’ of their purchase wears off. Then they’re onto buying the next thing. It’s a vicious cycle and a fool’s game. Thus, happiness isn’t the goal and so, no, it can’t buy you happiness. I’m personally rarely happy.

Contentment is the goal

Instead, what I strive for is contentment. Life satisfaction. Centeredness. Calmness. Those come from within you. You don’t need to keep buying things to get them. The more content and centered you are internally, the less room there is for frustration, anger, anxiety and other negative emotions.

Money helps buy contentment

And that’s where money comes in. Money can pay for things that helps add to your internal contentment and calmness.

Money can pay for basic necessities – housing, food, clothing.

It can pay for safety – being in a safe neighborhood, security cameras.

Pay to send your kids to a good, safe school.

It can pay for creative outlets – hobbies, travel.

Pay for doctors and therapists.

It can pay for emergencies whey they crop up which allows them to be inconveniences instead of disasters.

That all adds to your content, calm, centered existence.

Compare that to someone who can barely make ends meet. They’re burned out and sleep-deprived from always working overtime. Are constantly stressed and worried if they’ll be able to afford rent each month. They and their partner are always fighting over money. They’re always worried about the next emergency around the corner which could destroy them. They’re depressed, frustrated, anxious and they have no money for creative releases, see a therapist or take a vacation to recharge their batteries.

Clarifying a couple misconceptions

I’m not saying the person with money is better than the person without. Or that someone with money can’t be depressed or anxious too. That someone who is poor can’t be content. Or that money solves all problems.

All I’m saying is that money solves the problems that money can solve and it can solve a lot (but not all). But it takes the person with the money to have the right attitude about money so that it doesn’t go to their head (more on that coming up).

What does the research show?

Research backs my view. Nobel Prize-winning economist Angus Deaton and his colleague Daniel Kahneman at the Center for Health and Well-Being at Princeton University did a study on can money buy you happiness. Their conclusion:

“We conclude that high income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.”

Daniel Kahneman and Angus Deaton

They even determined the annual salary that makes people the happiness: $75,000/year. Any less, people weren’t as happy. But any more, people weren’t any happier. It’s a very interesting study. Read an article about it here and the study itself here.

And here’s a great video by Graham Stephan on if he thinks money can by happiness (spoiler: he does):

9. Having the right attitude

It’s critical that you have a healthy attitude towards money. Your attitude shapes the trajectory that your finances take over your entire life – for better or worse.

Be a good steward

The right attitude you need to develop towards money is one of stewardship. Be a good steward of your money. Realize that it isn’t yours but you’re only managing it while you’re alive. That keeps you balanced and humble. Manage it well and use it to take care of your needs and wants for now and in your future and then give it to your family or charity when you pass.

“A wise person should have money in their head, but not in their heart.”

Jonathan Swift

Money isn’t evil

But money isn’t evil either. The Bible verse is usually misquoted. It doesn’t say money is the root of all evil. It says “For the love of money is the root of all evil” (Emphasis mine) (1 Timothy 6:10 KJV).

Money is just a tool that we all need to use. You need to face money head on. Control your money or else it will control you. You need to keep it on a short leash. Be its master or else it’ll be yours.

“Money is a great servant but a bad master.”

Francis Bacon

You need to manage your finances intentionally.

10. Habits of wealthy people

Dave Ramsey did the largest study of American millionaires between 2017-2018. Some of the key findings are below. Of the 10,000 millionaires surveyed:

  • 79% did not receive any inheritance. While 21% received some, only 3% received an inheritance of $1 million or more.
  • 63% never took out a home equity loan or line of credit.
  • 9 out of 10 had never taken out a business loan and didn’t have credit card debt, student loans or car payments.
  • Eight out of 10 became millionaires by investing in their employer’s 401(k) plan.
  • They worked, saved and invested for an average of 28 years before becoming millionaires.
  • Three out of four millionaires said slow, consistent investing over a long period of time is the reason for their success.
  • Eight out of 10 millionaires came from at or below middle-income levels.
  • 69% averaged less than $100,000/year.

It’s pretty much the opposite of what most people think. And pretty BORING. Most wealthy people are ordinary Americans like me and you.

11. Getting wealthy fast vs. slow

The vast majority of the everyday millionaires that Dave’s team studied became millionaires slowly. They didn’t strike it rich through making a couple amazing stock picks. Or by being that computer genius in the garage that struck it big by dropping out of college to start a company. Or by hitting the lottery (like this guy who won the lottery again on TV… while demonstrating to the news how he won the lotto the first time).

Nope, it was nice and slow, usually over decades. That’s because becoming wealthy mostly comes down to investing enough money regularly in medium-risk investments over a long-time. And then letting compound interest work its magic which makes any small pile of money grow big (sometimes REALLY big) over a long time.

12. Understanding compound interest

Compound interest is interest on interest. Let me give you an example in case you’re not familiar with how it works.

Say you have $100 and will receive 1% compound interest on it daily. This is a crazy high daily interest rate (30% a month!) that no one would actually have but this is just an example.

That means that on the first day, you’re paid $1 interest ($1 is 1% of $100). So now you have $101 total.

On the second day, you’re still paid 1% interest but now it’s on the $101 – your initial $100 and the $1 of interest you’ve already made. So you’re paid $1.01 in interest. Slightly more than the day before!

The third day you’d be paid $1.02, fourth day $1.03 and so on.

That could really up if you kept at it for a while and it’d grow faster and faster.

A real world example

Let’s change our rates and time frames to something more realistic to give you a real-world example of the real power of compound interest now that you understand how it works.

Let’s say we still start out with $100. And let’s say we’ll get paid 8% interest on it annually. The stock market has averaged 8% annual returns. (Or more accurately: the S&P 500 has from 1957, when it adopted 500 stocks, to 2018. Read all about it here.)

Let’s also add an additional $200 each month. Let’s do this from now to when you want to retire at 65 and say you’re 20 right now.

After the 45 years pass, we look at our account and it is now worth… *drum roll please*… $1,058,523! That’s right – you’re now a millionaire and set for retirement. And you only put in $108,000 over 45 years and it grew that big. Now that’s the power of compound interest. This is a real-world example of investing for retirement.

Start investing now – time is of the essence

One more thing about compound interest before we move onto other topics. I want to show you why it’s so important for you to start investing at an early age.

Say if you waited to start investing for retirement until 30 years of age. You still start with $100, put in $200/month and retire at 65. Your money would only grow to $460,405. You’d have to instead put in $465/month to get it back up to around the $1 million.

(I know I’m saying “only” $460,000 as if that’s not a lot of money. It is a lot but probably not enough for your retirement. You’ll see why soon).

See that balance? The earlier the start, the less you’ll need to invest monthly. The later you start, the more you’ll need to invest. The point is, now is the time to start investing no matter how old you are. Time is of the essence when it comes to compound interest.

13. Understanding inflation, rate of return, risk and liquidity

Inflation is a general increase in prices and fall in the purchasing value of money. Average annual inflation rates in America is 1-2%. Inflation is purposely built into our economy.

Rate of return is percentage of profit made on money that is saved or invested. Like we said, the stock market has averaged 8%.

Risk is the chance of losing the money that has been saved or invested.

Liquidity is how easy it is to access the money that has been saved or invested. Money is more liquid the easier it can be accessed.

14. Understanding different types of checking/savings accounts

Checking/savings accounts give you a safe spot to park your money and most pay interest.

The different kinds of checking and savings accounts and how they relate to inflation, rate of return, risk and liquidity are summarized below.

Current USA rates are listed (as of 2020) but what’s more important is that you understand how the typical rate of returns for each type of account compare to the others.

Quick Info: Inflation reduces the purchasing value of money. Inflation runs around 1-2% annually in the USA. This means that you should subtract 1-2% from the rate of return of your investments. You’re actually losing money if your investments are not making at least the value of inflation.

In your house:

  • Description: To keep cash nearby.
  • Inflation: Purchasing power decreases at the rate of inflation.
  • Rate of return: 0%
  • Risk: High – can be lost, stolen, destroyed.
  • Liquidity: Very liquid. It’s accessible in your house.

Checking account:

  • Description: General purpose account to safely store money.
  • Inflation: Purchasing power decreases at the rate of inflation.
  • Rate of return: 0% for non-interest bearing, 0.1% to 1% for interest-bearing.
  • Risk: None – banks are fully insured up to $250K via FDIC.
  • Liquidity: Very liquid. Easily accessible through tellers, ATM, debit card.

Savings account:

  • Description: To save for future expenses.
  • Inflation: Purchasing power decreases at the rate of inflation.
  • Rate of return: 1-3%, the lower offered by traditional brick-and-mortar banks and the higher offered by online-only banks.
  • Risk: None – banks are fully insured up to $250K via FDIC.
  • Liquidity: Liquid. Easily accessible through teller and ATMs.

Money Market:

  • Description: To save for future expenses.
  • Inflation: Purchasing power decreases at the rate of inflation.
  • Rate of return: Slightly higher than savings accounts but higher minimum balance required.
  • Risk: None – banks are fully insured up to $250K via FDIC.
  • Liquidity: Liquid. Easily accessible through teller and ATMs.

Certificate of Deposit (CD):

  • Description: Similar to savings account, pays higher interest rate at cost of money cannot be accessed for an extended (12-, 24-,36-,48-month are common) without significant penalty.
  • Inflation: Purchasing power decreases at the rate of inflation.
  • Rate of return: Slightly higher than savings.
  • Risk: None – banks are fully insured up to $250K via FDIC.
  • Liquidity: Not very liquid. Money is locked for significant time and cannot access it without big penalty.

15. Investing in the stock market

Investing in the stock market means buying shares of stock in a company. A share is a small portion of a company’s value. When the company’s value goes up, your shares are worth more and when it’s value goes down, your shares go down with it.

Buying individual stocks

You can buy individual stocks. You can also buy groups of stocks which are called mutual funds and ETF (Exchange-Traded Fund). I strongly recommend you stay away from buying individual stocks. Too risky.

Sure, you can dream of picking a winning stock and making a killing, but for everyone that picked Apple, Google and Amazon, many others bought Pets.com, Webvan.com and eToys.com (all were big then went belly up when the .com bubble burst). Plus hindsight is 20/20 and you probably wouldn’t have picked the winners anyway.

Elon-Musk-Jeff-Bezos-before-and-after-becoming-wealthy
Would you have picked the guys on the left during the .com boom? 🙂

Invest in index funds

But don’t take my word for it. Listen to Warren Buffet. He’s worth over $80 billion. Made his money investing. Guess what he recommends? Just investing in index funds which include stocks of every company in an index such as the S&P 500. Nice, slow and steady wealth building.

He bet that professional hedge fund managers couldn’t pick stocks that would out-perform his “boring” index fund over a 10-year period. And he was right. He won the bet and the $1 million prize which he passed onto charity.

Buying stocks

Historically, you had to buy stocks and mutual funds through stock brokers. Then things moved to the web such as eTrade. Now many investing apps are available. Robinhood and may others offer commission-free stock trading and give you free stocks to lure you. Here’s a video from Graham Stephan explaining his top 5 picks:

The different types of stock accounts are listed below.

Individual Stock:

  • Description: To save for future expenses.
  • Inflation: Purchasing power decreases at the rate of inflation.
  • Rate of return: Slightly higher than savings accounts but higher minimum balance required.
  • Risk: None – banks are fully insured up to $250K via FDIC.
  • Liquidity: Liquid. Easily accessible through teller and ATMs.

Mutual Fund and Exchange-Traded Fund (ETF):

  • Description: A bundle of individual stocks.
  • Inflation: Affected by inflation. Value decreased at the rate of inflation.
  • Rate of return: Depending on how well the stocks within the fund perform, from 0% to sky is the limit.
  • Risk: High – no returns are guaranteed and can lose entire investment based on performance of the fund.
  • Liquidity: Relatively liquid. Can sell fund and get it’s value in cash within days.

16. Understanding different types of retirement accounts

Employer-sponsored retirement accounts are accounts that you can only open through your employer. These include 401(k), 403(b) and the Roth 401(k).

Personal retirement accounts are accounts that you can open and manage yourself. These include IRA (Individual retirement accounts) and the Roth IRA.

Taxes

All retirement accounts get Federally taxed.

If an account is funded with pre-tax dollars, the money is put into the account before taxes are taken out and then taxes are paid when money is taken out in retirement. 401(k), 403(b), IRA are pre-tax accounts.

If an account is funded with post-tax dollars, taxes are taken out when the account is funded and so no taxes need paid when you make withdrawals in retirement. 401(k) Roth, Roth IRA are post-tax accounts.

Which you should use is depends on many factors including if you expect to have a higher or lower tax rate in retirement compared to now.

17. Planning your retirement

Retirement planning is challenging

Planning your retirement finances can be challenging. Depending how old you are, it’s tough to figure out how much money you’ll need 20, 30 or even 40 years in the future. There are just too many variables over that time frame that can’t be determined:

  • How the stock market will perform
  • How much inflation will increase
  • How much money you’ll make throughout your career
  • If you’ll sustain any significant injury, disability or illness
  • And even if you’ll make it to retirement or die prematurely

The approach

So the best approach is to use reasonable estimates for the different variables, plan in padding for things that may occur like medical costs and understand the probability of how your plan will perform under different scenarios. Let’s deep dive into those.

Averages and reasonable estimates

  • Annual stock market return: 8%
  • Annual inflation: 2%
  • Life expectancy in USA: 78 years
  • Medical costs in retirementThis CNBC article reports that a healthy male-female couple retiring at 65 in 2019 can expect to spend $285,000 in health-care costs in retirement. They estimate $150,000 for women and $135,000 for men.

The 4% rule

The 4% rule is a popular rule of thumb to determine how much you should withdrawal from your retirement funds annually.

This is where you grow your nest egg large enough by the time you retire, you can withdrawal 4% of it annually for your expenses but it could still grow if the stock market performs at it’s historical average of 8%, even subtracting for 1-2% annual inflation. That means your retirement funds can actually grow during your retirement and outlive you (8% market performance – 2% inflation – 4% expenses = 2% growth).

Examples of the 4% rule

This is great for two reasons:

  1. You won’t have to worry about running out of money. The biggest concern a lot of people have is running out of money in retirement. Imagine, you’re 70, 80, 90 years old and… broke. Out of money at your most vulnerable. No money for costly medical needs. Maybe becoming a burden to your kids or grand kids. That’s a scenario we should avoid at all costs (pun intended). It’s estimated 40% of households will run out in retirement.
  2. You’ll have money to leave to your family or charity. Some people think it’s an either/or situation: they’ll either live old enough and use up their nest egg or they’ll die relatively early into retirement and leave a large pile of cash to others. But you can have both by using the 4% rule.

But to be able to use the 4% rule, we’ll need to grow our nest egg large enough. We’ll learn how to do that next through a series of steps.

BTW, some people feel 4% is too conservative while others think it’s no longer safe. You’ll need to be alert and flexible in retirement to gauge if you need to increase or decrease your withdrawals. Balance sustaining your life style vs. not running out of money.

Step 1: Estimate how much you’ll need in retirement

Our household expenses usually decrease in retirement and medical expenses increase.

Medical expenses go up because our bodies wear out as we age and we need more medical attention.

Household expenses go down because you no longer incur work expenses – lunches, work clothes, gasoline. Plus the kids are obviously grown so you won’t have any of child-rearing expenses – baby sitters, after-school care, etc.

A good estimate is that your expenses in retirement will be 80% of what they are now. But of course this is just a guideline and you’ll need to decide what you think your expenses will be.

You may be adamant that you won’t have a mortgage or car payment in retirement (which is a great idea) so your expenses may only be 65-70%.

Then again, you may decide you’re going to travel and pour a lot of money into your hobbies or maybe a side business. You may estimate that your expenses may actually go up in retirement and they’ll be 110-120% of your current expenses.

TASK: Calculate your current annual expenses. It’s easier to figure out your monthly expenses and multiple by 12 months. For example, If your monthly expenses are $4,000 then annual expenses would be $48,000.

TASK: Estimate how much your expenses will be in retirement. Calculate 80% of current expenses if you have no idea. In our example, If your current annual expenses are $48,000, 80% would be $38,400.

Step 2: Should you count on Social Security being there?

Should you plan on Social Security still being around when you retire? Contrary to what your friends and family may say around the dinner table or over a drink about it going bust, yes, you should absolutely count on Social Security being there for your retirement. It won’t go insolvent.

Even if no changes are made to Social Security, it will still cover 79% of its obligations until 2090. It’s a reduction but that’s worst case scenario. But realistically, it’d be political suicide if politicians let that happen so they’ll make changes over the years and decades to help fix Social Security’s shortcomings.

Step 3: Figure out how much you’ll get from Social Security

Create a free account at the official Social Security website. It’ll pull your actual work history and tell you what you’re currently estimated to receive in retirement. It can be a substantial part of your retirement funds.

TASK: Subtract how much you’re estimated to get from Social Security annually from your estimated annual expenses in retirement. In our example, If you’re estimated to receive $20,000 in Social Security annually, subtract that from your estimate annual expenses in retirement of $38,400.

The difference between your estimated annual expenses in retirement and your estimated Social Security benefits is the shortfall that you’ll need to pay with your nest egg that you’ll save up before retirement.

Step 4: Figure out how big your nest egg needs to be – x25 rule

A good rule of thumb is to multiple your estimated annual expenses in retirement by 25 and that’s how big your nest egg should be. So if you want to withdraw $40,000 annually in retirement, your nest egg should be $1 million.

TASK: Calculate how big your nest egg should be. In our example, our estimated annual expenses will be $38,400 after Social Security. Multiplying that by 25 is $960,000 – how big your nest egg should be by the time you retire.

Step 5: Factor in inflation

The 25x rule doesn’t take inflation into consideration. Inflation can really eat away at your nest egg. By this article’s calculations, you should multiple the size you estimate your nest egg needs to be by the following amounts to get what your inflation-adjusted nest egg size should be:

  • If you’re 10 years from retirement, multiply by 1.48.
  • If you’re 15 years from retirement, multiply by 1.8.
  • If you’re 20 years from retirement, multiply by 2.19.
  • If you’re 25 years from retirement, multiply by 2.67.

In our example, we estimated that we’d need a nest egg at retirement of $960,000. But that’s in today’s dollars. If we’re 25 years away from retirement, we’d multiple that by 2.67 and we should actually building a nest egg of $2.5 million. That’s because due to inflation, $2.5 million will have the same buying power as $960,000 does today.

Inflation is hard to calculate for and it’s a complex subject. Most people don’t even think about it or are aware of it. Sometimes to their detriment. There are different approaches to tackling it. Multiple by the rates above. Or use an inflation calculator. Review your nest egg performance annually and use the inflation calculator to see if you’re still on target to having a big enough nest egg and make necessary adjustments.

Step 6: Keep taxes in mind

You need to keep taxes in mind when planning your retirement. Remember, if your retirement funds were funded with pre-tax dollars, such as with 401(k)s, you’re going to need to pay taxes on it in retirement. Taxes can really cut into your nest egg. Plan accordingly.

Step 7: Figure out how much you’ll need to invest monthly

The general guideline is to invest 15% of your income into retirement accounts. If most people did just that and ‘set it and forget it’, they’d probably financially survive their retirement.

But you’re not most people. You’re researching and trying to figure this stuff out – and have made it this far into this really long (and hopefully really helpful!) blog post.

Use a retirement calculator to see if it estimates that you’re saving enough to grow your nest egg large enough to what you calculated it needs to be.

Enter:

  • Your current age
  • The age you plan to retire
  • How much you have saved for retirement
  • How much will you contribute monthly
  • What you think your annual return will be (8% is reasonable)

Step 8: What to do if you’re not investing enough

Does the calculator show you that you’re on track to having a big enough nest egg? Yes? *fireworks* Awesome! … and phew! 🙂

But what if it shows it’s going to be too small? Then you really only have few options:

  1. Retire later
  2. Contribute more per month
  3. Spend less in retirement

I know it’s easier said than done and easy for me to say but that’s the truth.

Retiring even just a couple years later can grow your nest egg a lot more due to compound interest. But of course most people don’t want to grind away for a couple more years.

Or you may be able to find extra money to invest once you work through the Baby Steps and get out of debt. Play around with the retirement calculator to see different options.

If you’re nowhere close to having enough for retirement, you might need to make big changes such as a new job or career.

Step 9: Review your plan with a financial advisor

You should run your plan by a financial advisor. You may think you have the world’s greatest plan but could be dead wrong and you want to get this right.

Dave Ramsey’s team offers a free consultation via his SmartVestor network. This is nice because you know the consultants understand and follow Dave’s 7 Baby Steps. Many banks also offer free reviews of your finances and retirement planning.

Just be weary. Most have good intentions but watch out for the snakes.

Even those well intentioned, they still want your business and make money off of you. So they’ll try to sell you on moving your funds over to their management (for a fee of course) or may try to sell you on life insurance, etc. None of this is necessarily bad but make sure you understand if it’s in your best interest and something you actually need.

One thing an advisor can help you with is walking you through retirement account management. For example, as the years progress, they can tell you when it makes sense to move some of your funds from one type of retirement account to another for tax and other benefits. These moves can save you tens or hundreds of thousands of dollars in the long run. They’ll know the latest tax law and deadlines that can change from one year to the next and advise you accordingly.

Step 10: Run your numbers through a Monte Carlo simulator

Everything in life is about probabilities and retirement is no different. You should run your retirement calculator numbers through a Monte Carlo simulator to see how they perform. Here are two free ones: this one is web-based and this one is downloadable software.

It’ll run your numbers through hundreds of different scenarios: good markets, bad markets, high inflation, low inflation. And a whole bunch more. Dozens of variables and hundreds of scenarios. All trying to figure out what is the probability of your money not running out during your retirement. For example, it’ll pop up a percentage: “You have a 90% chance of your nest egg being large enough.”

Step 11: Review your plan and performance regularly

You should review your retirement funds and plan twice a year to see how they’re performing. Those are the times to make sure you’re still on track to have a large enough nest egg.

Don’t get into the habit of always watching how your retirement accounts and the stock market in general are doing. The stock market naturally rises and falls and it’s too easy to start panicking or celebrating every dip or pop.

That’s a wrap on retirement planning. Let’s move onto other topics.

18. Getting health insurance

You can start receiving Medicare when you turn 65 years old. This is medical insurance that you’re paying into just like you’re paying into Social Security. It covers many medical costs. Some of the plan is free, other parts aren’t. There are co-pays and deductibles just like employer-sponsored or private health insurance. Here’s a great summary on Medicare.

19. Purchasing life insurance

Life insurance pays out money to your beneficiary upon your death. It’s meant to provide financial protection for those that were relying on your income that you left behind when you pass away.

A good rule of thumb is the policy should be 10-15 times the amount of your income. For example, if you make $75,000/year, you should get a policy $750,000 – $1,125,000. But it depends on your specific life circumstances.

If you’re married with young kids and the only bread winner, get a bigger policy.

If you’re married without kids and both you and your partner work full time, you may get a smaller policy.

You should instruct the beneficiary to invest the payout and live off the returns instead of spending the payout directly. That’s another reason why the policy should be big enough. It’s just like the 4% rule for retirement. If you got a $1 million policy, and if the markets do 8% a year on average, that pays out $80,000/year. So your spouse would get $80k/year as if you were still working.

Life insurance payouts usually aren’t taxed which is great.

Make sure you’re getting a policy from one of the best life insurance companies. You want to make sure there’s a good chance they’ll still be around to pay out when you die.

Buy term-life insurance.This is where the policy lasts for a specific term of time. For example, until you’re 70 years old. The policy’s monthly cost will depend on how old you are when you purchase the policy, how long of a term you purchase and how healthy you are (they make you get a physical).

Stay away from whole life insurance. They tie insurance and investments into one package and the investments perform poorly. Here’s Dave Ramsey explaining it:

20. Putting wills and trusts in place

You should get a last will and testament in place. Without one, when you die, your estate could become tied up in the courts, especially if there’s disagreement over what should happen to your belongings. Your will spells out exactly who should get your money and belongings after you die, speeding up the process.

You can write your own will by using software such as Quicken WillMaker or websites like Rocket Lawyer. Legal in all 50 states. You’re walked through a helpful wizard. Print it, have it notarized, file it away safely and tell your loved ones where it is. Just as legit and legal as paying an expensive lawyer.

You should also complete the following documents while you’re at it and put them with your will (WillMaker and Rocket Lawyer also handles these):

  • Health Care Directive (Living Will & Power of Attorney)
  • Durable Power of Attorney for Finances
  • Final Arrangements
  • Information for Caregivers and Survivors

Trust funds

Your will becomes public record once you die (isn’t that… weird?). Everything you owned and everything you owe goes on display. Anyone that you owe money to gets first dibs on collecting from your estate. This process is called probate and can take up to 6-12 months.

You should set up a trust fund. This stops your will from becoming public. It also avoids it from going to probate and so speeds up the process dramatically.

You need five documents to put a trust into place and you did four of them in the previous step. Now you just need to create a living trust document which WillMaker and Rocket Lawyer can also do.

Andrei Jikh explains it more walks you through setting up trust funds in this video:

21. Making and keeping a budget

It’s important to make and keep to a budget. Every one of your dollars should be given a job each month.

If you’ve never done so, you should keep track every dollar you spend for a month. Use an app like Mint.

You might be amazed, shocked and disgusted at the results. Notice any patterns? Anything you’re happy about? Anything you want to change? Anything you can cut back on and put towards paying down debt or into savings and investments?

Dave Ramsey’s guidelines are:

  • Housing (mortgage, rent) – 25%
  • Food (groceries, restaurants, fast food) – 10-15%
  • Utilities (electric, water, garbage, heating gas) 5-10%
  • Transportation (car loan, car insurance, gasoline) 10%
  • Recreation (entertainment, subscription services) 5-10%
  • Health (gym memberships) 5-10%
  • Insurance (life insurance) 10-25%
  • Children (day care, summer camp, allowance)
  • Misc. (pet supplies, house supplies) – 5-10%
  • Giving – 10%
  • Saving – 10%

Other guidelines

  • Your mortgage should not be more than 28% of your gross income.
  • The ‘50/30/20 rule’ – popularized by Elizabeth Warren – states 50% of net income should go towards needs, 30% towards wants and %20 into savings and investments.
  • Another guideline is that 15% of gross income should go into retirement accounts.
  • Here are ten other good financial rules of thumb.

22. The 7 Baby Steps

Let’s walk through the 7 Baby Steps. They’re a clear path from getting out of financial crisis mode, to paying off debt, building an emergency fund, investing for retirement and becoming wealthy.

Do steps 1-3 one at a time, 4-6 at the same time and then you reach step 7.

Dave Ramsey says to be “Gazelle intense” during Steps 1-3: you’re focused, throwing every dollar you have at your goals. You’re cutting back on spending until you get through those steps.

23. Baby Step 1 – Creating your emergency fund

The first step is to save up $1,000 as your initial emergency fund if you don’t already have that saved. This makes many emergencies become inconveniences instead of disasters. Research shows that many Americans can’t afford emergencies:

But many emergencies that cost this much are always right around the corner: tire goes flat, appliance breaks, hot water tank goes, car needs fixed.

Save up your $1,000 quickly. Throw everything you can at it. The point of only saving up $1,000 is for it to be be big enough to cover most emergencies but small enough to make you uncomfortable and work through the next steps quickly so that you can build up a true emergency fund to cover larger and more expensive emergencies.

24. Baby Step 2 – Getting out of debt

The second step is to get out of debt. You pay off all interest-bearing debt except the mortgage in this step.

Debt is the #1 killer to getting wealthy. It ties up your money that could go into investments or savings instead. You also waste a lot of money paying interest.

Pay off debt as fast as possible and never take it out again:

  • Credit cards
  • Car loans
  • Car leases
  • School loans
  • Home equity lines of credit (HELOC) or equity loan

There are two main methods to pay off debt:

  1. Debt snowball. Pay off debts from smallest to largest balances. Pay off smallest balance first as fast as possible. Once that’s done, then tackle the second largest balance and so on until all debt is gone (except the mortgage). This is what Dave Ramsey recommends and I do as well. Even though it makes more mathematical sense to pay off accounts with the highest interest rates first, in this step you’re looking more for an emotional win and it’s very satisfying and motivating to pay off those balances and knock out that debt faster and faster.
  2. Debt avalanche. This is paying off debts from smallest to largest interest rate. Like I said, this makes more mathematical sense because you’ll be saving money on the higher interest that you pay off. But you may not have much of an emotional win since you might be stuck on paying on a debt that is large and not paying anything off for quite some time.

25. Baby Step 3 – Growing your emergency fund

Once all debt except the mortgage is gone, it’s time to grow your emergency fund to 3-6 months of expenses. This will be your permanent emergency fund which is meant to cover larger and more serious emergencies such as job loss or severe injury or illness.

It’s up to you to decide how much to save but typically it’s between 3-6 months worth of expenses. You may decide to only save 3 months if you feel you have a stable job in a stable industry. You might instead save 6 months if you’re a freelance consultant that may have to go along time without work between gigs.

26. Baby Step 4 – Saving and investing for retirement

Once you have built your emergency fund, you’re onto step 4 – saving and investing for retirement. The guideline is to put at least 15% of your income into your retirement accounts. But you may know you need to put more or less in depending on what the retirement calculator told you in the previous step. Make sure you at least invest enough to get your company’s full 401(k) match, if they offer one.

27. Baby Step 5 – Paying for children’s college

While doing step 4, you also do step 5 – paying for your children’s college. Of course skip this if you don’t plan on having children.

If you do have children or plan to, I recommend investing into a 529 plan. They are a college savings fund. They have advantages and disadvantages.

You should also read Anthony Oneal’s Debt Free Degree book. He’s one of the Dave Ramsey personalities and follows Dave’s teachings. He teaches how to go to college debt-free. His book walks you through what you and your children should do year by year, starting in middle school, to get ready to have them to go to college debt-free. He teaches sound advice and gives details on how to:

  • Apply for a lot scholarships and grants
  • Go to community college for the first two years if possible then transfer to four-year degree
  • Go to in-state public colleges because it’s so much cheaper (compared to out of state and private)

28. Baby Step 6 – Pay off house early

While investing for retirement (step 4) and children’s college (step 5), Dave Ramsey says to pay off the house early in step 6 at the same time. I’ve looked at both sides of this and ultimately decided this is where I’m not following the Baby Steps and we’re not paying off our current house off early. A couple reasons…

We ended up getting just about the the lowest 30-year fixed mortgage rate of all time (so far) by happenstance. The lowest ever was 3.31% in November 2012 and we signed ours in October at 3.37%. Subtracting inflation of 2%, it’s as if our rate is 1.31%. That’s hard to beat. I understand we’re still paying interest and it’s not actually “free money” as some would call it, but, man, that’s an amazing rate.

We’re planning on moving and not living in this house forever. We’re going to sell this house and build a small ranch out in the country once the boys move out. Between what we’ll get for this house and savings/investments, we won’t need to have a mortgage on the next house.

Even if our rate was higher or we were planning on living here forever, I still don’t think I’d pay it off early. I think there’s some great reasons not to that Dave Ramsey isn’t aware of disagrees with. Graham Stephan does a great job explaining them here:

29. Baby Step 7 – Building wealth and give

Finally, you reach step 7. Looking back, it makes sense:

  • Step 1 – You’re get out of crisis mode by creating a $1,000 emergency fund.
  • Step 2 – You pay off debt to free up your money to make it start working for you.
  • Step 3 – With all the debt gone, you build emergency fund up to 3-6 months.
  • Step 4/5/6: Now with an emergency fund and all debt gone, you:
    • Invest for retirement (step 4)
    • Invest for children’s college (step 5)
    • Pay off the mortgage early (step 6)
  • Step 7 – You put the rest of your available money in savings and general investment funds, enjoy life (responsibly) and give to others.

Dave is fond of saying, “You live like no one else now so that later on you live and give like no one else.”

I highly recommend reading Dave’s book “The Total Money Makeover” which explains the Baby Steps and their many nuances.

You should also binge watch him on Youtube – informative and entertaining. Here’s his latest videos:

30. Consider taxes

State and federal taxes – Strive to not have to owe or get a refund each year. Getting a big refund may feel nice and exciting, but it’s not free money. It’s your money that you lent the government interest-free all year and they’re just returning it to you. You’d do better to get that money in each paycheck and and save or invest it.

Do your own taxes online unless you have a complicated tax situation (most people don’t). I’ve been using FreeTaxUSA for years and it’s great. Federal is free, state is $12.95. It walks you through everything. Painless.

Don’t evade any taxes – pay the least amount of taxes legally, but don’t evade. You will be caught.

31: How to teach kids about money?

They’re never too young.

32. Reminder: Do NOT do these things

  1. Never take on debt. You can’t borrow your way to wealth.
  2. Never try to ‘keep up with the Joneses‘. Most people are broke even though they put up a good front. Real wealth comes from slow, intentional wealth building.
  3. Don’t play the lottery. There are so many reasons not to. Save and invest the money instead.

33. Conclusion

Does this ‘ultimate guide’ cover everything? I wish it could! Even at over 8,500 words, it can’t cover everything. It can’t since we’re all different and no one can write a step-by-step plan that fits everyone’s exact situation.

But I’ve tried including everything that would raise you to the next level in managing your finances, give you a path to success, contentment and wealth and to show you that it is possible! It’s everything I’d share with you over dinner (a looooong dinner).

34. Over to you

I want to make this the best guide on the Internet to getting wealthy. How do you think it can be improved? Did I miss anything? Miss the mark on anything? What’s your best advice for becoming wealthy? Let me know in the comments below.

More importantly, I want to hear from you about your personal journey. What’s your relationship with money been like? You struggles, your wins. Feel free to leave a comment below or send me an email.

To your growth,
Jason

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Jason Howe

Jason Howe is the founder of Man the Ship.

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