The 10 Steps to Life Changing Wealth.
The only 10 steps you need to cover all of your financial bases.
Most people don’t struggle with money because they lack discipline. They struggle because they just aren’t quite sure what to do next.
Financial advice is everywhere: invest here, pay off that, buy this. Real wealth doesn’t come from chasing one random idea after another. It comes from knowing what’s important to do first, second, third, and so on.
This guide gives you the 10 most important steps to build Life Changing Wealth, reduce financial stress, and become work-optional. In the right order. One thing at a time.
A few general principles to keep in mind
Align with your partner: Talk openly about financial goals and habits, and make sure you are working toward a shared vision. It’s ok if you think differently about money. If one’s a spender and one’s a saver, use them as assets to balance each other and build a stronger team.
Give generously: Contribute to your community through time, money, or action. Focus on what you can give now; abundance builds happiness, networks, and long-term wealth.
Invest wisely: Favor diversified, low-cost index funds for reliable long-term growth. Warren Buffett certainly thinks so. Real estate and other active investments can come later, once your foundation is set.
The 10 Steps to Wealth
1. Get your employer match for your 401(k) or 403(b) retirement account.
There’s no easier free money than your employer retirement account match. Not everyone gets a match, but if you do, take advantage of it before doing anything else, even before paying down credit card debt. Similarly, if your employer has a discounted stock purchase plan, take advantage of it in this step.
What if I don’t know what to invest in?
Enter the Target Date Fund. A target date fund is an investment fund that automatically buys the typical asset classes you need, sets your asset allocation based on your age, and then adjusts it over time to optimize for a “target date,” commonly a person's expected retirement date. As the target retirement date approaches, these funds gradually shift from higher-risk investments, such as stocks, to lower-risk investments, such as bonds. They might have slightly different names depending on the funds that are offered, like Fidelity’s “Freedom Funds,” T. Rowe Price’s “Retirement Funds,” Schwab’s “Target Index Fund,” and BlackRock's “LifePath” funds.
Target Date Funds are fantastic. Asset selection and allocation are complex topics. Luckily for us, an army of economists at places like Vanguard is researching this for us and using it to design their Target Date Funds. And they come with low fees. Vanguard’s options are here. Simply look for the one with the year in the name that most closely matches your planned retirement year. Fidelity, BlackRock, and Schwab also have good options.
What if my 401(k) doesn’t offer Target Date Funds?
That is rare. Most large providers offer at least one option for an equivalent to a Target Date Fund. If that's the case, go with a 3-Fund portfolio of index funds with the lowest fee % that your 401(k) plan offers.
2. Pay down high-interest debt.
Process note: I recommend doing this step and the next step simultaneously. The two steps are mutually reinforcing, making both more effective.
High-interest debt includes credit cards, payday loans, and personal loans. My general rule is that any interest rate above 7% should be considered high-interest.
Paying down these debts is earning you more money because every dollar of principal you pay down means less interest charged to you next month. Do whatever you can to pay off more and more of the principal each month.
Which debt should I pay off first?
From a strictly financial point of view, paying off the debt with the highest interest rate should be paid off first because it generates the biggest benefit. However, some people find it more motivating to eliminate a single debt altogether. If that’s you, you can start by paying down the debt with the smallest balance so that you eliminate it and then move on to the next.
3. Start tracking where your money is going. Focus on the big picture only.
Detailed budgets don’t work for most people, and I don’t recommend them. Life is too variable to hold to the same $X for coffee and $Y for groceries every month. They often lead to extra stress and a feeling that you aren’t doing well enough. Thankfully, they also aren’t necessary to build wealth.
Even though budgets don’t work well, tracking your money without stressing over every cent does. It’s a subtle distinction but an important one.
There are great apps that do this for you with nearly no work. With Mint.com gone, I recommend Empower Personal Capital (free) or Monarch Money (paid). You link your credit card and bank accounts, and then the tools import and categorize your spending and income for you.
Start by checking your spending every month or two. At this point, we want to understand the big picture of your spending and focus only on what matters. In particular:
Are your fixed costs <60% of your take-home (housing, bills, groceries, car, gas)
Are you saving and investing something each month? The goal is to grow this over time to >15%.
Everything else is fun money. Do whatever you want with it!
Understanding is enough to help you start thinking differently and naturally make decisions that make sense without feeling like you are sacrificing. You may also notice areas where you are ‘leaking’ money that you can address and free up cash for other things (e.g., are you paying for a subscription you don’t use anymore?)
4a. Start building a right-sized Emergency Fund.
The standard advice is 3-6 months of essential living expenses. That’s a good starting point. However, depending on your situation and risk, the amount you need may differ slightly. To think about your risk, ask yourself - What could go wrong financially for me? How much would it matter if I lost my job? Or my spouse?
You should plan to have a larger emergency fund if you have a family, a big mortgage, and/or a single income. You might need less if you have two incomes and fewer fixed costs, such as housing and cars. If in doubt, aim for 6 months.
A High-Yield Savings Account is often the best option for holding your Emergency Fund. Pick an account that pays good interest from a reputable bank. Here’s a list of the highest-interest accounts right now.
4b. Add any missing insurances.
Aside from the typical insurance most people already have through their work (Health, Dental, Vision) or are required to have (Home, Auto), there are a few others that are valuable tools for managing financial risk. Your employer might already be providing some coverage for these.
Life insurance (if not provided by employer): Term life insurance is usually the simplest and most cost-effective way to protect your family during the years they rely on your income, helping replace earnings and cover things like a mortgage or other debts if something happens to you.
Disability insurance (if not provided by employer): Protects your income if illness or injury prevents you from working, which is more common than most people realize. Employer coverage helps, but long-term disability insurance is especially important for high earners with families who depend heavily on their paychecks.
Umbrella insurance (optional): Provides an extra layer of liability protection on top of your home and auto insurance, kicking in if you’re sued and basic coverage isn’t enough, which is particularly valuable if you have higher assets or earning potential.
5. Contribute the maximum to an HSA and set up automatic investing (if available).
NOTE, ADVANCED STRATEGY: This step is an requires some additional diligence and understanding, as well as the funds to be able to pay out of pocket for some short term healthcare. It’s not for everyone, so some people may choose to skip step 5 and move on to 6, which is fine as well.
HSAs offer a triple tax advantage that no other account can match, especially when you wait to use them to cover medical expenses in retirement, when you often have the most costs to cover.
To open an HSA account, you must have a “high-deductible health plan” (HDHP). If your work doesn’t offer an HDHP and HSA, you may be out of luck. If you don’t have an HDHP, you must wait until your next open enrollment period to change your medical plans.
Why are HSAs so great? First, contributions to your HSA are tax-deductible, reducing your annual taxable income. Second, the money in your HSA grows tax-free. Third, when you withdraw funds for qualified medical expenses, they are also tax-free.
When you invest your HSA funds, it becomes a powerful investment vehicle. Most people use them as a fund to pay medical expenses as they occur. However, there’s a better strategy. If you can pay out of pocket for your medical expenses (earning cash back with your credit card!), rather than using your HSA, you can leave the funds in your HSA to grow tax-free. This creates another tax-free retirement account for you. Then, you can reimburse yourself for medical expenses at any time in the future, including in retirement, when you can expect high medical costs.
How much is too much in an HSA?
There isn’t any ‘too much’ because there’s no downside to saving more in an HSA - even if you save more than what you need to pay for medical expenses in retirement. HSAs have another feature that allows you to withdraw money from them for regular retirement expenses, essentially turning them into a Traditional retirement account. Win-win.
This is the end of part 1 of the Playbook. In Part 2, we cover:
Maxing out your Roth or backdoor Roth IRA.
Automating savings for future goals
Maximizing your 401k or 403b.
Minimizing taxes.
Accelerating wealth growth in taxable investments.
Paying off low-interest debt.
Ready for part 2!
Super helpful! Eagerly waiting for part 2!