Step #4: Develop YOUR Road-Map

I realize that you probably have a clear picture of where you want to be one day, but my guess is that you have no idea how you’re going to get there. With that in mind, the 4th step of “How to Become Rich” is all about giving you some guidance so that you can develop your path as to exactly how you’re going to become rich.

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First, Establish a Solid Foundation

Learning how to live on less than you make — which involves aspects of budgeting, reducing your expenses, and figuring out how to increase your income — was the first step to building your financial foundation. With that in place, it’s time to develop some tangible goals:

Step #1: Have Money Set Aside for Emergencies

Building an emergency fund is one of the most important things you can do.

If you have consumer debt (anything other than a mortgage), then I’d first suggest you build a $5,000 starter emergency fund. Then, once you’re out of debt (or if you’re already out of debt) I’d suggest you build a fully-funded emergency fund of 6 months worth of living expenses.

This money should be stashed away in a MONEY MARKET or SAVINGS ACCOUNT.

Personally, I’d suggest keeping about $1,000 in cash (at your home) or at your local bank/credit union, but for anything beyond that you should use a company like EverBank . With the amount of money we’re talking about, the interest you’re going to earn isn’t going to change your life, HOWEVER, as we talked about in the first lesson: it’s smart to make as much money on your money that you can. The reason I like EverBank is because of EverBank’s Yield Pledge Promise: they “promise your rates will always be in the top 5% of competitive accounts at leading banks.”

Simply put: establish a firm foundation by stashing some money away for emergencies. Once you’ve reached 6-months worth of expenses though, STOP adding money to that account.

You want to FULLY fund your emergency fund (6 months of expenses), but you don’t want to OVER-FUND it!

Step #2: Be Completely Debt Free (except for your mortgage)

Being debt free is an integral step you must take in order to build wealth. How can you expect to become rich if you have $200, $500, or $1000 worth of payments every month that are going to the bank (or creditor) instead of towards your investments?

It’s taken YEARS for us to get out of debt, but it was a step we had to take and it’s one you must complete as well.

Develop a Wealth-Building Strategy

After you’ve established a 6-month emergency fund and have eliminated all of your debts, you’re well on your way to becoming rich! The final step left in your journey is simply saving money and working your way towards a comfortable retirement.

Before you move on to developing your plan, please take a minute and read this post I wrote up about retirement planning: How to retire comfortably: start with the end in mind.

In regards to building wealth, there are a myriad of options for you but it’ll be up to you to determine what fits your personality and interests. Here are a number of options though:

1. Take Advantage of your 401(k), 403(b), or 457

I wrote a post comparing the differences between the 401k, 403b, and 457, so if you don’t know what each of them are, then check that out.

If your employer offers a company match, then investing in your employer-sponsored plan (the 401k, etc.) MUST be the first place that you invest money. The important part here is to only invest up to your employer’s match. For instance, if they match 100% of 3%, then you should only put in 3% of your paycheck (nothing more). If they match 50% up to 5% of what you put in, then you should still put in all 5%.

To put it into perspective 50% on 5% is still an additional 2.5% of FREE MONEY!! That means you get a 50% return BEFORE your money is ever invested in the stock market!

FREE MONEY = 1st Place you should investment your money.

2. Max out the Roth IRA every year!

Tax-Free growth on your investments is an unbeatable proposition and the Roth IRA is the king of letting your money grow tax-deferred, but also TAX FREE! Meaning, that you pay taxes now on the money you contribute, but you’ll never pay taxes again.

For more on traditional investing, check out these posts: Everything You Need to Know about a Roth IRA and Tax Free versus Tax Deferred.

TAX FREE MONEY = 2nd place you should invest your money.

3. Think Outside the Box: Peer-to-Peer Lending

The best friend you can have on your path to becoming rich and building wealth is HIGH rates of return. The higher rate of return you earn, the faster you’re going to become wealthy.

Take this for example:

If you invest $20,000/year for 20 years and earn 8%, you’ll end up with $1,024,759. However, if you invested the exact same amount and just earned 10% (instead of 8), you’ll end up with $1,335,212.

That’s a difference of $310,000 (for doing nothing other than earning a higher interest rate)!

With that in mind, one of my favorite ways to earn high rates of return is by investing in P2P lending. It’s been around for quite a few years and sites like LendingClub and Prosper make it very easy to do. Peer-to-Peer lending is simply what it sounds like: you loan (i.e., invest) your money to somebody else. Basically, you become the bank (or just a portion of the bank as other people help you fund the loans).

Loans are repaid over a period of 3 or 5 years; you find out why the borrower is requesting money and you even get to find out information such as their credit rating, their debt-to-income ratio, etc.

Depending on how risky you want to be, you can AVERAGE anywhere from 5.5%-13.5% on your investment. I’ve personally experienced a 10% average return on my loans.

Visit the sites (LendingClub and Prosper) when you have some time, browse around, and learn a little more about how their system works. It’s all very safe and secure. Heck, between the two of them there has been over $1 BILLION dollars that has been loaned out.

4. Real Estate, Real Estate, and more Real Estate

Becoming a land-lord is a GREAT way to build long-term, passive income and earn a decent return on your money. The problem with real estate is that you need a lot of money to start as you should always be leery of taking on too much debt.

It’s hard to become rich when you’re taking on debt to do it (ask any small businessman that) and it increases your risk of failure significantly. So, if you’re going to invest in real estate, make sure you ALWAYS pay in cash or put at least 30-50% down.

Frankly, my entire early retirement plan consists of: traditional investing through 401(k)s and Roth IRAs, building some truly passive income through peer-to-peer lending, and getting some semi-passive income through real estate. That’s it…it’s that simple.

5. Build you own business

Finally, the best way to become rich is to build your own business. In the last lesson I suggested Dan Miller’s book to you and I’ll suggest it again: 48 Days to the Work You Love.

Being a business owner isn’t for everyone: it takes a lot of dedication, sacrifice, and it’s not as easy as people make it out to be. Saying that, it is one of the best ways to become rich as 50% of millionaires in this country are business owners.

If you’re looking for creative and inexpensive ways to start up your own business, then here is his other book (again) that I suggest that you check out: 48 Low or No Cost Business Ideas.

Keep it Simple, Stupid

The greatest mistake people make when trying to become rich is that they attempt to make it happen overnight. Reality is that building wealth takes years and often decades to accomplish. So, while my suggestions on how to build wealth are rather elementary, the fact is that building wealth is very simple.

Anybody can become rich as long as they’re patient. It’s really easy to become a millionaire; I’m well on my way and you can be too.

The important part to understand with this 4th lesson is that you simply need to develop a road-map and get started. I want to encourage you to start saving and investing AS SOON AS POSSIBLE. Start investing in your 401k, open up a Roth IRA (I’ll suggest a few companies to use later), and test out the Peer-to-Peer lending (you only need $25 to start).

The longer you wait to start building wealth, the longer it’ll take to get there. Albert Einstein said it well,

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

The most important factor in compound interest is TIME; the longer it’s working in your favor, the better off you’ll be.

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About the Author

By , on Mar 31, 2013
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{5 Comments}

  1. Kelly says:

    Great steps! I like that you have making an emergency fund #1 because it does seem like everything else falls after or should come later. Having an emergency sum of cash is vital because it is the one thing that can prevent falling into financial chaos if something unexpected happens which is inevitable.

  2. Living on less than your means is ideal for saving money for the future. Living on a small budget doesn’t have to be a bad thing, it can be challenging and fun!

  3. I haven’t gone into P2P lending just yet, but have been tempted to do so. A 10% rate of return sounds great. I would be concerned about the risk of default, and a resulting major impact on rate of return as Marvin shared in his comment. With your loans, has there been a strategy behind your success of avoiding defaults?

  4. Would love to read what you have to say about money markets. Great post.

  5. I like all of these ways of building wealth with the exception of P2P lending. In my experience I have had far too many loans default and it ended up dragging down the rate of return severely.

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