From Zero to Millionaire (Or negative thousands to millionaire if you’re like me).

When I first started fixing my finances I had more debt than I had stuff. I’m on the path from negative thousands to millionaire. I still have a long way to go, but I’ve learned to group everything needed into five phase. They overlap a little, but they’re all important.

 

First Phase Make More Money

What it is

If you have no money, or worse you’re like me when I started and have a ton of debt, then the first thing you need to do is make more money than you spend. I talked a little bit about that in my post Three Rules of Money. It’s important to get your spending under control. It’s equally important to make more money. This will make it easier to pay your bills and give you more to save.

How to do it

When I started this journey to fix my money problems I got a different job. I was a lot harder work, but it paid a little better and had a better future. That is probably the most common way to increase your money. Other ways include getting a second job, or starting a side gig like tutoring kids. Any skill that you have can be put to work to help you make more money. You can check out my Way too Many Ways to Make More Money list for ideas to get you thinking. Remember, think about the things you can do, not the reasons you can’t do something that someone else does.

 

Second Phase Save it

What it is

Once you’re making more money than you’re spending it’s time to save some of it. Things happen. Cars break down. Kids get sick. These things need money. With some money saved you will have extra money to cover these types of unexpected things without having to put it on a credit card or borrow the money. Most people call this an emergency fund since it’s used for emergencies. There is a lot of advice on how much this should be. Dave Ramsey, a popular personal finance expert, recommends starting by saving $1000. That can seem impossible at first. But by adding a little each time you receive some money you can build up to that $1000 quicker than you think.

How to do it

Start by opening a savings account if you don’t already have one. If you have a checking account it’s usually easiest to open a savings account at the same bank. You can also open an online savings account. That can make it easier to save since it will be harder to access the money when you don’t really need it. Put a little in there before you pay for the fun stuff. When you build it up to your starting goal, I recommend $1000, then move on to phase 3. Being consistent is the most important part. Even if that means that some paychecks you can only deposit five dollars. Being disciplined enough to do it every time will make it easier the next time.

 

Continue to save when you move to phase three. That way you can secure your foundation even more. Most financial planners recommend having enough in savings to cover several months’ worth of expenses.

 

Third Phase Pay Off the Debt

What it is

This is the phase that gets you out of trouble. Once you have more money coming in than you are spending, and you have some money saved up for an emergency it’s time to get rid of your debt. Here I’m talking about things like credit cards not a mortgage. When you have debt you are paying interest to the person you owe money. The longer you take to pay it off the more money you give away in interest. So getting rid of the debt saves you money since you won’t have to pay interest. It also frees up more of your money for saving or fun stuff.

How to do it

There are several strategies for paying off debt. One of the most recommended is called the debt snowball method. It’s called that because it starts off small, but by the end you’ve made it huge by paying off so much. What you do is pick the debt you want to get rid of most. If you’re a math person it would be the one with the highest interest charge because that will save you the most money. If you’re motivated by checking things off then it would be the smallest balance because you’ll get to finish it sooner. But you can pick any one. Pay the minimum payment on all of your other debt. Put all your extra money toward the loan that you want to pay off first.

 

Here’s an example. Say you have three loans $5000, $3000, and $1500. And each loan has a minimum payment of $100. If you have $1000 to put towards debt each month you could put $100 to the first two and then $800 to the third. This will allow you to pay off the smallest loan in two months. Once that’s payed off you will only have two loans. This is a simplified example. Let me know in the comments or send me an email if you’d like me to expand this out with interest rates and payments to show how this would work completely.

 

Fourth Phase Invest

What it is

Most people start this phase before completing phase three. As phase three progresses some of that extra money can be put to work to help make you more money. That’s were investing comes in. This can be complicated. When most people think of investing they think of the stock market. They think of buying stocks and selling them for a higher price later. This can be true but can be misleading also. If you truly want to buy individual stocks on the idea that you can sell them for more money later you will need to read and understand financial reports from the company. Most people don’t have time for this. Or the desire to read accounting statements. However, investing in stocks or other things can be a very powerful way to make money. So how can we do that safely?

How to do it

First, if you want to invest in the stock market I recommend not buying individual stocks unless you love reading financial reports. Instead you can buy index funds. Index funds buy hundreds stocks so when you buy into the fund you are buying hundreds of different companies. This protects you in case one company does badly. The funds are run by people who love to read and understand financial reports from the companies they invest in. I’ll talk more about index funds in a later post. But in the mean time I’d recommend checking out fidelity.com or vanguard.com and investing in an S&P 500 index fund like Vanguard’s VOO. Keep in mind the value will go up and down over time, but since the US economy is fundamentally strong it will go up in the long run.

 

 

Fifth Phase Create

What it is

Sometimes people swap this phase and phase 4. This is where you create something of value to sell. This could be your own book. This could be something you build. This could also be a service that you offer. The idea is that you create something of value and sell that you other people. This gives you even more income and can lead to perpetual income. For example, if you create a song then you get money for it every time it is sold whether you did anything or not. In many ways this comes full circle back to the first phase. The difference is that in the first phase you are looking for a side job to help make a few extra bucks. In this phase you are creating the side job and the value. This is where entrepreneurs are when they create a new product to sell.

How to do it

There are a lot of ways to create value. Etsy.com is a website that was started for people to sell their crafts. You could also start a business that provides a service or sells goods that people want to buy. You can take another look at the Way too Many Ways to Make More Money list. You can also look at your skills and find something that you can do. Then offer to do it for other people. Look for a problem, and find a way to solve it. The idea is that you create value that will help people. You create a solution to a problem that people will be willing to pay you to solve.

 

Where are you in the phases? Do you see any other phases in your journey to improve your financial strength?