Through my Financial Coaching practice with The Financial Gym, I’ve been able to work with hundreds of people from all different backgrounds. I have in-depth conversations with clients to learn their financial histories and future goals while creating comprehensive financial plans to help them achieve those goals. Through this work, I have started to notice a pattern. While all of my clients deal with the stress of paying off debt, updating their spending habits, and learning how best to save, I’ve noticed my Black clients have a particular sense of urgency. At some point with almost all of my Black clients, I end up having a conversation along the lines of, “Yeah, but what do I invest in to get this money faster?” or “Well, we don’t even be livin’ that long anyway, so why am I saving so much for the long-term?”
I don’t blame my clients for thinking this way. Considering that Black people hold about 10% the wealth as our white counterparts, it makes sense that we would feel like we’re playing financial catch up. And, when the fact is our life expectancy is nearly six years shorter than white people— it only makes sense to want to make hay while the sun shines. That said, there are proven steps to building wealth within our economic system. However, these methods are not flashy and typically don’t lead to getting fast money. But they’re simple and easy to implement, which means anyone can do them. If you’re someone who is serious about improving your personal finances then commit to following these eight steps. I promise you can’t go wrong.
1. Take a step back to figure out what you need from life.
Every successful life strategy starts with understanding your “why”. When it comes to your finances, that can mean many different things. Maybe that means being able to live on your own in a big city, having the financial stability to start a business, or being able to give your kids the opportunities you never had.
Whatever it is that you need to make money for, it’s something beyond “not living paycheck to paycheck” and “having financial peace of mind.” Those two phrases are the results of getting your finances together, but they don’t speak to the underlying reason for your money. It’s crucial to understand what’s truly important in your life and to know that what you discover may have nothing to do with what your friends, family or society says is important.
I have a client who realized she was trying to force her life to work in an expensive city. She was pushing her business to make as much money as possible while having no time for the luxury and leisure she craved. After finally taking a much-needed vacation, she realized she could conduct her business as a digital nomad. She sold her expensive possessions and now lives an emotionally richer but less expensive life. By getting clear on what is truly important for you, it will become easier to see the myriad of options that are available.
2. Identify your spending triggers.
Now that you know WHY you need money, it’s time to be brave and see where your money actually goes. Look at the last 90 days of your checking and credit card statements to identify patterns.
- Look for the category where you spend the most money.
- Identify the business or services you repeatedly spend money on.
- Identify the expenses that are overpriced.
- Identify where you spend on services that you don’t realize you’ve been spending money on.
Determine what is driving your behavior to spend. Is it convenience, status, loneliness, boredom, something else? In my case, I noticed that I had spent money at Kroger over 20 times in ONE MONTH! In my defense, there is a Kroger literally a block from my house and we all have to eat right!? Admittedly, I was being lazy. I wasn’t planning my meals and creating a shopping list ahead of time. I had gotten into a pattern of making one-off trips that were leading me to overspend on groceries big time. Fun fact: food is one of the biggest spending categories.
Once I figured out my spending trigger, I was able to create a strategy for cutting back on the expenses. In my case, it meant challenging myself to plan for one full week of meals, shopping only on Sunday, and getting creative with ingredients if I forgot to pick something up that week. Regardless of your spending trigger, you can find a more efficient way to spend in that category. Maybe it’s planning ahead like me. Maybe it’s disconnecting your credit card from the source (this is especially effective for places like Amazon). It could mean cancelling a service altogether or even avoiding a specific route to work or walking down a particular street.
3. Expand your income options.
Unfortunately, it’s not enough to have one source of income these days. At any point, one or more of our income streams can dissolve completely, but that won’t stop the bills from coming. For extra security, it’s important to develop additional streams of income. This can mean anything from taking on a second, part-time job to investing in dividend stocks (only after you’ve completed items 4, 5 and 6 on this list).
These days, starting an online business is one of the most reliable ways to create passive income and can also come with tax benefits and additional opportunities to invest for your retirement in a tax-advantaged way. Just be sure to keep your business and personal finances separate so you don’t end up accidentally spending your grocery money on business expenses. Also, get realistic about how much you can earn in the business compared to how much you’re spending to keep it afloat so you don’t end up with an expensive hobby.
4. Automate your savings.
By addressing your top one or two spending triggers, you will create the surplus you need to start saving consistently without throwing off your budget or getting into trouble with over drafting. In fact, getting this step right is the heart of building wealth. What it all comes down to is creating a cash surplus by either spending less or earning more and then saving / investing the difference.
To get started, determine an amount of money you feel comfortable automatically saving each paycheck. Even if it’s just $20, going through the trouble of creating this habit will make a HUGE difference. Next, open a high-yield savings account and have money direct-deposited from your paycheck or auto-drafted out of your checking account each pay period. You want this process to feel out-of-sight and out-of-mind so you will never miss the money.
5. Prioritize your emergency fund.
You may be tempted to start investing any extra money you come up with, but if you don’t have anything saved for emergencies, you’re frankly not ready for that step. Your emergency fund is the foundation of your financial health and future wealth. Starting to invest before you’ve saved anything is like trying to run a 100-meter dash before you’ve stretched. You might start off fast, but if you pull a muscle right before you cross the finish line, you’re still going to lose the race.
I recommend that most of my clients have at least six months of expenses saved, but I recommend nine months for those who are self-employed. This usually equates to tens of thousands of dollars, which might feel like an extravagant amount of money to have sitting in a savings account that only earns .5 – 1% interest. I get it. But here’s the thing; life is extremely unpredictable. You never know when you might have to replace your car, suddenly fly to take care of a family member, or search for a new job because a global pandemic made yours unviable. As our world becomes more and more unpredictable, it becomes more crucial to have predictable funds to fall back on.
6. Stop paying money to spend money.
The other most crucial step before starting your investment journey is paying down high-interest debt. If you are paying more than 7% interest for any debt while actively investing in the stock market, you are hustling backwards. Over the long-term, the stock market has created a return of about 7% for the last 200+ years, so getting rid of debt where you’re paying interest higher than that is better than beating the stock market.
First, figure out your credit card or loan that has the highest interest rate and start paying as much extra toward it that you can consistently afford. Even $10 above the minimum payment will help you start saving instantly. Be sure to automate this process to make it as easy as possible. Once you’ve paid the first card or loan, roll over the full extra payment to the next highest interest card or loan. Keep doing this until all of your high-interest debt is paid off. Credit can be a powerful wealth building tool, but only if you’re using it in a way where you’re not making hefty extra payments.
7. Think about “future you.”
After you’ve paid off your high-interest debt and saved at least one month’s worth of expenses, it’s time to start thinking about your future. Because you likely won’t be earning income at some point in your later years, you will need to have a lot saved to be sure you can pay your bills. Unfortunately, the current working generation can’t rely on social security being abundant or even available, so it’s imperative that you start saving as soon as possible.
The sooner you start saving, the less you need to put aside each month to reach your retirement goal. To find out how much you need to save each month, calculate your current total expenses for the month. Multiply that by 300 – the F.I.R.E. multiplier (4% withdrawal rate times 12 months). Enter this number into a retirement calculator that assumes you will be investing in an account that will earn you about 7% interest on average. Start automatically and consistently investing that amount of money into a highly diversified, low cost fund.
Here are the steps I recommend for building your retirement savings:
- Invest in your company’s 401(k) up to your employer match (if you have one).
- Invest the maximum $6,000 per year into a Roth IRA.
- Invest the maximum $3,600 allowed into an HSA (if you have one).
- Start a business that allows you to invest in a self-employed retirement plan.
- Invest in a taxable investment account if you still need to save more toward your retirement.
8. Do all of the other things next.
Once you have established these pillars of financial health:
- Automated your savings.
- Built your emergency fund.
- Decreased your high-interest debt.
- Automated your retirement savings.
You are ready to do all of the other things. We tend to want to rush to the big money millions without putting our financial foundation in place first, but that’s a mistake. Take the time to build a strong financial foundation so you can continue to build the rest of your wealth as large and elaborately as you like.
Once you have established yourself financially, you’ll be in a place to more quickly and efficiently do things like: buy a home, invest in unique assets and business opportunities, start higher risk businesses that require more up front capital, and save for future generations.
For most millionaires, building wealth is a slow and boring process. The reason that we mostly hear wealth building stories about genius entrepreneurs and amazing stock market picks is because those are great stories. There is frankly nothing exciting about opening a high-yield savings account and consistently saving into a tax-advantaged retirement fund. However, that doesn’t change the fact that these are great ways to manage your money.
Yes, it is absolutely possible to earn high returns on speculative investments like cryptocurrency and forex and anything else you’ve seen pitched on Instagram. However, the operative word here is speculative. None of these investments come with a guarantee and if you don’t have the money to lose, these are not investments you’re ready to take on.
While the world is changing quickly, when it comes to building wealth it’s the tried and true path that I see working most often. Good luck on your journey!
Bevin Morgan is a Financial Trainer at The Financial Gym who has paid off over $200K in debt to become debt free. She is a real estate investor and self-proclaimed personal finance nerd. She specializes in helping Black female entrepreneurs and creators gain confidence in their financial futures with a touch of woo woo. She is on a personal mission to help bridge the racial wealth gap in this country. Black families hold less than 10% the average wealth of white families. Instilling financial confidence in Black women is one small step she’s taking to help change that.
Find her at www.bevinmorgan.me or on Instagram, @bevinmorgan.