Money for the Rest of Us

The financial goal of most working professionals is to build a substantial net worth in order to retire comfortably and enjoy the finer things of life. The truth is that with proper money management most working professionals could actually retire quite young. The real factors that come into play are how much do you earn and what standard of living do you want to enjoy both during your working career and in retirement.

If you are an average wage earner, but live beyond your means, then of course it will be very difficult if not impossible to retire comfortably. However, if you choose to live below your means, then building a substantial net worth may not be as difficult as might thing. Let’s break down some numbers.

The average worker in America makes $40,000/year. If you are earning that each year, and your wage grows with inflation at 3% per year, you will earn over $1 million in 20 years. Now, if you climb the career ladder and begin receiving raises at some point that eclipse 3%, then your earnings will increase substantially more. The reality is that most average American professionals will earn more than $2 million in a 30 year career. Now with proper savings and investing habits, that amount should be plenty to retire comfortably! In this article, we will address the number 1 most important step everyone needs to make in order to begin developing a substantial net worth—building an emergency savings plan.

Why’s and How’s of Emergency Savings Account

First of all, this is not exciting. And that is why so many people have a hard time doing it. The idea of becoming a millionaire and building a substantial net worth is exciting, but the practical steps that must be taken are not so exciting. Cutting back on discretionary spending, paying off debt, and building emergency savings are not necessarily the most exciting things to do, but they are essential if you desire to build a large net worth.

An emergency savings account is recognized by most personal finance experts as essential. The reason is simple. The number one enemy of financial success is debt—especially credit card debt. Most people finance unexpected expenses with credit cards, and this behavior oftentimes becomes a very unhealthy cycle. The average American household with a credit card carries a credit card debt of $15,000! Credit card debt is the primary enemy of building net worth.

An emergency savings account prevents a person from accumulating credit card debt. By building a cushion of at least $1,000 in a savings account, then when unexpected expenses arise such as emergency doctor visits, car trouble, or random household expenses, you will not have to accumulate more debt on a credit card. Instead, you can pay out of your savings. Then, as you dip into your savings for an emergency, simply replenish the account as you are able to until it is back up $1,000. This is cushion of savings is an essential first step toward financial independence.

Next Step After $1K Emergency Fund Is In Place

Once you have built up your initial savings, then your attention should be directed toward paying off bad debts including credit cards, credit lines, car loans, etc. These debts also weigh on net worth substantially over time. Finally, after bad debts are paid off, then you are ready to take the next step of savings which is to build 3-6 months of savings in case of job loss or other large unexpected expenses. Then, when all of these steps are taken, then you are ready to enter into the “exciting” aspects of building net worth which involve aggressive investing in various assets and possibly learning how to trade with a forex course, but this debt-free, savings based foundation must be laid first.