After years of studies and personal interviews with millionaires and billionaires I've compiled this comprehensive 8 step process to becoming financially secure. The plan is simple, get out of debt, invest for the future, and attain multiple streams of income. If followed in the exact order listed below, you will achieve financial security. This is not merely an interesting theory of mine, but is a proven plan.
1. Get Rid of All Credit Cards
According to the Forbes 400, the best way to build wealth is to get out of and remain debt-free. Many seemingly intelligent people will tell you to keep a credit card so that when you "pay off your credit card each month" you can build credit. Here's a little secret though, financially independent individuals don't use credit cards and don't need credit (with the possible exception of buying a house) because they purchase everything with cash and NOT on credit.
Your debit card will do everything that your credit card will do (with the exception of the whole credit thing that you don't need). Many people seem to believe that there is more risk involved with using a debit card than a credit card. I don't know where this myth came from because Visa regulations actually require banks to offer the same protection that their credit cards do.
2. Starter Emergency Fund
Before you start tearing down the walls of debt, you need to put aside $1,000 (or $500 if you make under $20,000/yr.) for emergencies only. Starting a business is NOT an emergency. Christmas is NOT an emergency. Your emergency fund is for those unexpected events that cost you money such as car breaking down and needing repairs.
3. Pay off Debt
You do this by using the Dave Ramsey approach called the "Debt Snowball". You list all of your debts, including ones to family and friends, starting from the smallest amount of debt to the largest amount of debt. After you have done so, pay only the minimum monthly amount due and put all your extra expenses into tackling the smallest debt. After you have eliminated one smaller debt you have begun to build momentum, allowing you to put more money into paying off the next debt item on your list. Continue this process until everything is paid off with the exception of the house (we'll get to that one later).
After you have paid off your debt, it is time to set up your full emergency fund. In order to calculate how much you need for an emergency fund, figure out how much money you need to live off of for 6 months and then put that money into a separate Money Market Account (MMA) that is not attached to your checking account to protect yourself from overdrafting and dipping into your emergency fund.
5. Get Insurance
Now that you're debt-free and have money set aside for emergencies, lets start protecting your money you already have. Be careful as to which insurance you choose, however, most are not good investments sadly enough. There are 4 types of insurance you should invest in, health, life, disability, and long-term care. If your work provides basic health insurance for you, great! Otherwise you should get an MSA (Medical Savings Account). You should purchase only one type of life insurance and that's term-life insurance. It's a temporary life insurance that will be more than suffice until you have completed each of these steps and have built up so much wealth that you will be self-insured.
6. Invest for the Future
If you make under $100,000/yr then you qualify for a Roth IRA which averages over 12% compound interest each year over the course of your working lifetime. Best part of it is that you can withdraw your money at the time of retirement TAX-FREE! And if at any time you start making more than $100,000/yr you can roll your Roth IRA into a traditional IRA. If your company offers a 401(k) plan then you should invest in that in addition to your IRA.
So how much should you invest? Depends. I would never advise less than 10%. If you can't afford to invest 10% of your income into retirement then your current standard of living is way too high and you need to downsize FAST. I personally systematically set aside 10% for tithing, 10% for retirement, and since I'm an entrepreneur I set aside 10% for future business ventures and 10% in random investments such as stocks and real estate. You can adjust these numbers (or eliminate the 10% for future business ventures), but do not go any lower than 10% of your income for retirement.
Despite what others may tell you, millionaires do NOT "invest" in things such as their own home, art, or fancy cars. I'll explain more about the home in step 8, but millionaires will not invest in anything that will not give them back a positive cash flow, that's why they're millionaires. Yes, some may buy lots of expensive foreign cars and original works of art, but that's because they enjoy those things, not because they see them as investments.
7. Multiple Streams of Income
When I did door-to-door sales I can't tell you how many times I heard about one spouse losing a job so they could barely afford to pay their mortgage let alone add extra payments. First, if you live below your means as mentioned earlier and have a fully funded emergency fund then having your spouse lose his/her job should not be a huge dilemma. Second, poor people only have one stream of income per person, rich people have several streams of income. I have one friend in particular who has 4 streams of income that brings him in over $34 million each. Do you think if he lost his job he'd be hurting? Of course not! He works because he enjoys it, not because he HAS to. Multiple streams of income will help project you towards faster than any other way AND it creates a safety net around you and your family so that if anyone loses a job, you and your family are secure because you have 3 or 4 other sources of income. You will be out of the rat race and will be truly wealthy when your residual (passive) income exceeds your expenses and you work not because you have to work, but because you want to work.
Why was this step not included with paying off debt in step 3? Because too many people have a paid for house and no money in the bank. However, millionaires do not hang onto their home mortgages for the "tax benefits". That is a myth by people who pretend to be rich. How do we know they're not rich? Because rich people can do math and would never suggest hanging on to a home mortgage. The reason for this is because the average household will pay $10,000 each year in interest on their home in order to receive a $3,000 tax deduction. That means you're paying $10,000 in order to save $3,000. Basic math will tell you that is $7,000 that you will never get back! Also, the average household will have purchased their home more than 3x by the time their 30 year mortgage is paid for. This is why I want to rip my hair out when I read others who say that millionaires keep their home mortgages.
I acknowledge the fact that several of you will not agree with what has been said, but like I said, nothing I have written is theory, it's all been proven by thousands of ordinary people like you. You are not forced to change your spending habits or lifestyle, but if you want to truly be wealthy and get out of the rat race you will. Good luck.