Broker Check

8 Steps to Building Wealth: Financial Waypoints

September 20, 2023

Step 1: Base Emergency Fund

  • The first step in building a solid financial foundation is establishing a base emergency fund. The base emergency fund is not designed to act as a full emergency fund and is meant to cover small emergencies like unexpected car repairs or health care expenses.
  • The base emergency fund should be $2,500. All savings above and beyond this should be put towards step three.
  • When completing step one, you should not be contributing to your 401(k), Roth IRA, IRA, or any other retirement account.

Step 2: Get Employer Match

  • How often do you have the opportunity to get up to a 100% return? The employer match does exactly that.  It is free money! 
  • After you have $2,500 saved in step one, make sure you are contributing to get your full employer match. Most companies offer a match of 3-4% of your salary/income.

Step 3: Pay Off Consumer Debt (Except Mortgage)

  • This includes credit cards, car loans, personal loans, and student loans. These types of debt wreak havoc on your personal finances and can be detrimental to your long-term financial success.  All income and cash beyond steps one and two should be put towards consumer debt.

Step 4: Full Emergency Fund

  • After all consumer debt is paid off, the next step is to establish a full emergency fund. The full emergency fund should be 3-6 months of your expenses.  For example, if you spend $5,000 a month, your full emergency fund should be $15,000-$30,000.
  • You should be able to get access to these funds quickly. We recommend putting your emergency fund in a high-yield savings account.

Step 5: Save for Retirement

  • We recommend saving 15% of your gross income for retirement. The employer match should not be included in calculating these numbers.
  • Going back to step 2, you should get your match first. If your employer offers a Roth 401(k) option, you may want to consider allocating all or a portion of your contributions to the Roth 401(k), depending on your tax situation.
  • If you don’t have the ability to contribute to an employer plan, you can open a Roth IRA and make contributions to that account. The maximum contribution to a Roth IRA for 2023 is $6,500.  If 15% of your gross income is more than $6,500, the remaining contributions can be made to a taxable brokerage account.
  • Want help setting up a plan to invest for retirement? Book a meeting here!

Step 6: College Savings

  • If you have kids and want to help pay for some or part of their post-secondary education, this is when you start saving.
  • We recommend contributing to a 529 plan. 1 

Step 7: Pay Off High-Interest Mortgage

  • Once you are out of consumer debt, have a fully funded emergency, and are saving 15% of your gross income towards retirement you should focus your remaining dollars on paying off a high-interest mortgage.
  • What is considered high interest? We believe that this really depends on your age.  If you are in your 20s, we consider a mortgage above 7% high interest.  If you are in your 30s, we consider a mortgage above 6% high interest.  If you are in your 40s, we consider a mortgage above 5% high interest.  If you are in your 50s, we consider a mortgage above 4% high interest.  If you are in your 60s, we recommend paying off your mortgage with any extra income.

Step 8: Extraordinary Accumulation

  • Congratulations! You’ve made it to Extraordinary Accumulation!  This is where you really start reaping all the benefits of your hard work.  In this step, we recommend spending your hard-earned dollars on things that bring you value and giving generously.

Download a copy of our Financial Waypoints guide. If you want help working through the steps, schedule a free meeting here!

1 A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty. Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met: 1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA.