Do you know what it takes to level up your finances? Whether you’re struggling financially and want to start thriving, or if you’re financially stable and want to reach financial abundance, this guide is for you.
Level 1: Emergency mode (financial instability)
If you’re in emergency mode, your income-to-expenses ratio is not sustainable. Being in emergency mode means that you spend or owe more money per month than you take in. Financial instability is an emergency that requires immediate action.
How to level up your wealth:
If you’re financially unstable, you need to take some drastic steps to improve your financial situation:
- Pay down high-interest debt as fast as possible—however, you might have to temporarily prioritize necessary expenses over high-interest debt payments if you have to choose between the two. It’s worth contacting your creditors directly to see if you qualify for a hardship plan.
- Reduce the interest rate on your debt by refinancing.
- Refuse to take on any more debt.
- Cut your expenses to the bare minimum.
- Eliminate discretionary spending.
- Sell assets that are costing you more than what they’re worth.
- Dramatically increase your income by working overtime, switching jobs, or picking up a second job. Ultimately, if you can’t cut your expenses any more, anything besides landing a higher-paying job is going to be a temporary solution.
Level 2: Living paycheck-to-paycheck
If you live paycheck-to-paycheck, you spend almost as much as you earn. Living paycheck-to-paycheck means struggling to have enough money for necessities like food, housing, utilities, and other basic costs of living. If you live paycheck-to-paycheck, you probably don’t save or invest much (if anything) because almost all of your money goes toward necessary expenses.
How to level up your wealth:
Embrace ultra frugality—and get rid of high-interest debt.
If you live paycheck-to-paycheck, you need to do everything you can to maximize your income, minimize your expenses, and pay down any high-interest debt you have. This might mean working overtime, picking up an extra job, or cutting out all discretionary spending. Whenever you live paycheck-to-paycheck, you must make every dollar count toward your financial goals.
If you have high-interest debt, getting rid of that high-interest debt will be a major factor that allows you to have enough breathing room to reach the next level of wealth. If you don’t have any high-interest debt, embracing ultra-frugality and making every dollar count toward your financial goals will help you increase your savings rate to escape the paycheck-to-paycheck cycle.
Escape the low-income trap.
While you might need to take any job to give yourself an extra cushion of income, you don’t want to get stuck in a cycle of low-paying jobs.
If you can’t cut your expenses any more, the only way out of the paycheck-to-paycheck cycle is to increase your earning potential, which means getting extra skills or specialized job experience.
If you live paycheck-to-paycheck, you need to aggressively prioritize learning a lucrative skillset and/or applying to higher-paying jobs, or you’ll likely stay trapped in a cycle of low-income jobs indefinitely.
Many people try to escape the paycheck-to-paycheck cycle by doing dead-end gig work like taking surveys online for money; unfortunately, that’s going to really hurt you in the long run for the following reasons:
- It’s paying you less than minimum wage.
- It’s not increasing your earning potential.
- It’s a high effort, low reward situation, meaning that your time is not being utilized efficiently at all.
- It trains you to adopt a scarcity mindset, which only keeps you in a low-income cycle.
- It may help you out in the short term, but if you want to build wealth and become financially stable, you absolutely have to start prioritizing your long-term career over poverty-wage gigs. This can’t be emphasized enough.
If you want to escape the paycheck-to-paycheck cycle, you have to stop seeking out and accepting low-income jobs, and that means you have to stop accepting poverty-wage gigs like taking surveys for money and start prioritizing building a high-value skillset and applying to jobs that will increase your earning potential and give you a significant pay boost.
If you’re working paycheck-to-paycheck, you should actively screen out poverty-wage gig work or very dead-end jobs that won’t boost your earning potential. If you want to become financially stable, you have to single-mindedly pursue only the opportunities that will create that financial stability. Your number one concern is to pursue opportunities that will help your long-term growth.
Seek out small wins and start building your emergency fund.
The compounding power of small changes is crucial to escaping the paycheck-to-paycheck cycle. If you work paycheck-to-paycheck, you’ve got to make every dollar count toward building your financial stability. Start building your emergency fund, even if you’re just contributing a couple of dollars at a time. Embrace making small, positive changes even when it doesn’t feel like it’s worth it.
Some examples of small wins include:
- Increasing your savings rate by 1% at a time.
- Cutting out all discretionary spending until you have some emergency savings.
- Getting your full employer match on your employer-sponsored retirement plan. Your employer match is just a small percentage of your income, but if you don’t get your employer match, you could miss out on hundreds of thousands of dollars by the time you retire.
- Switching to a high-yield savings account to make your money work for you.
- Putting the cashback you earn from your credit card into your emergency fund.
- Using a reputable cashback debit card to increase the amount of cashback that you can put into your emergency fund.
These changes won’t make an immediate, instant change in your financial life, but you will see massive improvement over the long term if you embrace the power of small changes that compound over time.
Level 3: Getting by.
Getting by is halfway between living paycheck-to-paycheck and being financially stable: You reliably have a little extra money leftover each month, but you would struggle to pay for large emergency expenses.
If you’re getting by, you’re starting to save and invest, but you’re not quite where you want to be financially. You have some money saved for emergencies, but you don’t yet have a fully funded emergency fund and you are probably behind on investing for retirement. You might be putting money away for retirement, but you probably haven’t reached a 15% investing rate (let alone a 20–25% investment rate) yet.
How to level up your wealth:
Finish getting the basics down:
If you want to reach the next level of wealth—financial stability—you need to finish getting the basics down. This means you should:
- Get your employer match! Getting your full employer match could mean having hundreds of thousands of dollars more than you otherwise would have had by the time you retire. Yes, it’s that important.
- Aggressively pay down all high-interest debt until you have a $0 balance.
- Finish building your emergency fund. Make having a fully funded emergency fund a high priority. Sharply reduce non-essential spending until you have at least 3–6 months of expenses saved for emergencies.
Take some easy financial wins—if you haven’t already.
If you haven’t already done these things, you’re missing out on the opportunity to make saving and investing as easy as possible:
- Use a high-yield savings account to maximize the money you save.
- Try to increase your saving or investing rate by at least 1%. Embrace the power of small, positive changes that compound over time.
- Invest your cashback—and add a reputable cashback debit card to your repertoire so that you can increase the amount of free money you make.
- Automate your savings and investment contributions.
- Make saving and investing non-negotiable parts of your payday routine.
- Prioritize saving and investing over discretionary spending.
Keep saving, investing, and living within your means.
Once you’ve gotten your employer match, paid off all high-interest debt, and built a fully funded emergency fund, you’ve done a huge chunk of the work that it takes to reach financial stability. However, you can’t be financially stable over the long term if you’re neglecting your retirement contributions and other important savings goals.
Here are your next steps to reach financial stability:
- If you haven’t already started investing, start right now. Time is more important than money when it comes to building wealth. The longer you invest, the more money you have.
- Catch up on your retirement contributions: Know how much you need to invest to get on track to retire comfortably and make a budget to reach those goals.
- Invest at the very leat 15% of your income for retirement if you haven’t already.
- Create sinking funds so that routine necessary expenses (like quarterly insurance payments or car maintenance costs) don’t catch you by surprise.
Keep prioritizing your long-term career over poverty-wage gig work.
If you earn a lower income, increasing your earning potential and prioritizing finding a career is way more powerful than cutting your expenses or using low-wage gig work or dead-end jobs to earn extra income. And while you often don’t have the luxury of turning down a low-wage job to make ends meet, you should still keep investing in yourself and applying for higher-paying jobs in the meantime.
Level 4: Financial stability
If you’re financially stable, the following list describes your financial situation:
- You have extra money leftover each month and you don’t worry about making ends meet.
- You’ve got a fully funded emergency fund, so you don’t worry too much about large emergency expenses.
- You’ve created sinking funds for your upcoming necessary expenses.
- You’re investing at least 15% for retirement and thinking about increasing your retirement contributions to 20% or 25%.
- You’re on track to retire comfortably by the median age of retirement (age 62) or your desired retirement age.
- You have zero high-interest.
Another hallmark of being financially stable is that you very in control of your discretionary spending. If you’re financially stable, you’ve become proficient at the behaviors that create wealth.
- You prioritize saving and investing over discretionary spending.
- You would never go into debt for discretionary expenses.
- You minimize impulse purchases.
- If you had to take a pay cut, you would be fine with minimizing your discretionary expenses to make ends meet.
How to level up your wealth:
Increase your income.
At a certain point, increasing your income is more powerful than cutting expenses. If you struggled to reach financial stability despite cutting your expenses, you know that you can only cut your expenses so far. At some point on your journey toward thriving financially, you’ve got to increase your income. Continue to think long-term and prioritize opportunities that will be best for your long-term growth.
Avoid lifestyle inflation.
Don’t fall victim to lifestyle inflation; be strategic and conservative in what you spend. Keep your expenses low and your savings and investment rate high. If you increase your income, allocate that money toward saving and investing instead of increasing your monthly expenses.
Make reaching 100k your top priority.
If you don’t already have 100k invested, you need to make that your number one financial goal. The amount of compound interest you earn skyrockets after you hit 100k in investements, so the sooner you can surpass 100k, the sooner you can start thriving financially. And if you already have 100k invested, make reaching the next 100k interval your next financial goal.
Increase your investment rate to 25%.
If you’ve reached financial stability, you’re already investing 15% for retirement, but that’s probably not going to be enough if you want to start thriving financially.
Increase your savings and investment rate to at least 25%. If a 25% investment rate is too much for you, try to get to at least 20%.
A 25% investment rate may be impossible for you right now, but you can probably increase your investment rate by 1% more. Even a 1% increase in your investment rate does make a difference to your financial future.
Level 5: Thriving financially
If you’re thriving financially, you’re fast-tracking your wealth building journey: You’re investing at least 25% or more of your income, you’re on track to retire comfortably, and you’re on track to reach early financial independence.
How to level up your wealth:
Keep prioritizing investing. Make sure that you’re investing at least 25% of your income. You’ve already done the work to become financially stable, so at this point, reaching financial independence is just a matter of time, consistency, and dedication toward that goal.
Thriving financially means that you’ve already met your hardest but most important financial goal: Investing 100k. Now you just have to keep consistently saving and investing—it’s only a matter of time before you reach financial independence.
If you want to reach financial independence, you should know how much you need to have invested in order to cover at least 25x your annual expenses.
Level 6: Financial independence
When you’re financially independent, the amount of compound interest you earn is more than what you make at your job—you no longer have to work for a living. One hallmark of financial independence is having at least 25x your annual expenses invested.
When you reach financial independence, your financial portfolio will continue to grow if you can limit your annual withdrawals to 4% of your portfolio, adjusted for inflation.
How to level up your wealth:
If you want to go from financial independence to financial abundance, you should be investing more than 25% of your income. Investing more than 25% will help you fast-track your way to financial abundance.
But you should also know when enough is enough—reaching financial abundance should be in service to some larger goal or lifestyle choice. Rather than having money for the sake of having money, you should know what you want to do with the money you’ve worked so hard for—and you should know when it’s time to stop investing aggressively.
Level 7: Financial abundance
Very few people make it to this step. Financial abundance is not only being financially independent—it’s about having very few limitations on what you can do with your money.
You can reach financial independence and still be fairly limited in what you can spend; for example, maybe you never have to work again as long as you keep your annual expenses under say, $30,000. But that’s not financial abundance because you’ll probably have to closely watch your spending.
Financial abundance is financial independence + not having to really worry about your budget. When you have financial abundance, your budget has some room for luxury. You can travel without worrying about your budget. When you reach financial abundance, you can have a champagne taste and a champagne budget.
Regardless of which level of wealth you’re currently on, saving, investing, staying free of high-interest debt, and living within your means are going to be key to maintaining your financial wellness. If you follow these basic principles, you’ll reach the next level of wealth before you know it.