When I started this website, I was 25 years old and about $80,000 in debt. Nearly two decades later, I’m a middle-aged dad with enough money in the bank to sleep soundly at night. Call it wealth, call it FIRE. I call it security.

Sometimes, I still catch myself worrying about money. But I remind myself that the voice in my head worrying about money is 25-year-old me. Broke me. We’re OK now.

This feeling — of being having enough money to meet both current and unexpected needs — is what we all desire. But when you’re bogged down with debt or struggling to make ends meet, never mind save money, it can feel like a fantasy. The yawning gap between where you stand and the lives of people with money seems impassable. The longer you stare it down, the more you doubt your ability to cross it.

That’s when it’s time to remind yourself that they only way to “eat an elephant”, as the cliché goes, is “one bite at a time.”

My own road from debt to wealth was meandering. But, eventually, I settled into a rhythm of steady progress. This is the process I followed (more or less).

I hope it helps you navigate your own financial goals. All you can do is start where you are and work on the next step.

Step 1: Build a ‘bank account buffer’

About 37% of Americans can’t come up with $400 in cash to cover an unexpected expense (Federal Reserve, 2024). Given that an emergency room visit or car repair might easily be more than $400, we can assume the percentage of Americans who might struggle to pay cash for a surprise bill is higher.

This is why my first step is to build what I call a bank account buffer.

The idea of a bank account buffer is simple: It’s an amount of money in your checking account that’s between $500 and $800 or two week’s pay (whichever is more). Even though you, ideally, keep your bank account buffer in your checking account, you need to think of that cash as untouchable. Whatever you buffer is — $500, $800, or $1,500 — that amount of money becomes your new “zero”. You should never dip below it.

But you need to be honest with yourself. Some people (and I was one of them) will spend money if they have it. If that’s you, consider opening a different bank account for this money. You should be able to access the money quickly if you need it, but shouldn’t be tempted to spend it easily. Perhaps put the debit card to the account in a freezer or somewhere else where it’s out of sight, out of mind.

Building a bank account buffer will not only save you from costly overdraft fees but also begin to shift your mindset from always being broke to becoming used to having a financial cushion.

Step 2: Invest a token amount for retirement

Conventional wisdom says that if you have any amount of debt at interest rates over 6% to 7%, every free dollar you have should go towards paying that down. And indeed, if you have tens of thousands of dollars in credit card debt at 20%+ APR, you should do Step 3 first and come back to Step 2.

But if you’re paying student loans or only have a few thousand dollars in credit card debt to tackle, I recommend getting into the habit of saving even a tiny amount of money in a retirement account first. This could be a 401(k) offered by your employer, or an individual retirement arrangement (IRA) account that you can open at any broker.

Retirement is a vital but often-overlooked part of financial health. Even if you have more pressing money priorities, you want to get into the habit of saving for retirement early. Saving for retirement should be something you never have to think about, and the earlier you do it, the more your money can work for you thanks to compound interest.

If you’re paying down debt, you can start very small — even putting between 2% – 5% of your salary towards retirement is a good start. Once you’re out of debt, you’ll want to increase this percentage substantially.

One final note: If your employer matches contributions to your 401(k) or similar plan, try to contribute the maximum amount they will match. Failing to do so is like leaving a portion of your salary on the table.

3. Get rid of “bad” debt

I don’t really believe there’s such a thing as “good” debt, but some debts are definitely worse than others. Namely: Credit card debt, personal loans, and auto or student loans with an interest rate greater than 6%-7%.

After you have a Bank Account Buffer and are contributing a small amount towards retirement saving, your priority should be to pay off bad debts as fast as possible.

If it’s important to you to save as much money as you can, pay off the debts with the highest interest rate (APR) first. Otherwise, start with the debts with the smallest balances so you can celebrate milestones sooner as you pay them off in full.

What about other student loans and other debt?

Lots of us have student loans that may not qualify as “bad” debt. If you have student loans with an interest rate over 6.5 percent, I would encourage you to pay them off in Step 3.

If, however, you have federal loans with a 5%-6% interest rate, that decision is less clear. Personally, I would not pay extra on these student loans. I would continue saving and investing instead.

I don’t know whether I can beat a 5%-6% rate of return in the stock market, but I would hope to at least match it (in the long run) with the possibility of doing even better. Also, some student loan interest is tax deductible. Finally, if you save money rather than paying off your loans early, you have cash available that provides flexibility should other opportunities arise (in investing or in life).

Ultimately, the decision is yours. If your priority is to become debt-free as soon as possible and you prefer the guaranteed return of paying down your student loans early, there’s nothing wrong with doing so.

Step 4: Save for emergencies and retirement

After you’ve eliminated all high-interest debt, it’s time to turn your sights on savings.

Although a Bank Account Buffer can insulate your finances from small unexpected expenses, it’s no substitute for a full emergency fund: A savings account that contains at least three months of expenses (preferably six months).

An emergency fund should be stored in an FDIC-insured high yield savings account that’s separate from your primary bank so you won’t be tempted to spend it.

At the same time as you build your emergency fund, you should be increasing your retirement savings until you’re saving as much as you comfortably can each month. Putting away 10 percent of your savings is a good start, but if you really want to build wealth, you should strive to eventually be able to save 25 percent or even a third of your income.

Step 5: Save for something you want

As you increase your savings rate, don’t feel like it ALL has to go towards retirement. In fact, you can feel free to evenly split saving for shorter-term goals and saving for retirement.

There’s a lot of life to live between now and retirement. Whether your next goal is a wedding, a vacation, or a down payment on a home, plan ahead so you can pay for your goal with cash, not credit.

Step 6: Invest and donate as you see fit

Have you reached the point where you:

  • have no bad debt and
  • are saving enough to cover all of your wants in the next few years?

Congrats! Feel good about yourself, because most people rarely get to this point. Now your goal should be to contribute the maximum legal amount to retirement accounts every year. This will maximize your tax savings.

With money left over, you can invest on your own in a taxable brokerage account or pay down lower-interest debts like federal student loans or your mortgage. And, of course, if you haven’t been doing so already, set aside money to give back to charity.

The half-step: Create an additional stream of income

When I was 25, I was $80,000 in debt and had a day job that paid about $35,000 a year. At that salary, I was keeping my head above water, but it was going to take 10 years or more to get out of debt. So I got side hustles. First, I started working nights and weekend at Starbucks. Later, I started earning small sums doing freelance writing and, eventually, from this website. With not one but three sources of income, I paid off my debt in three years instead of 10.

I list an additional stream of income as a half-step because it’s not for everyone. You may already be spending the hours outside of work going to school or as a caregiver. The key thing is that you don’t focus solely on cutting expenses and saving money, but also earning money. In many ways, I think it can be easier to find ways to earn more money than it can be to find savings in an already-taxed budget.

Notes

You may be familiar with Dave Ramsey’s Baby Steps, which, in part, inspired this list. His steps have helped a lot of people, but like all canned advice (including my own), they’re not going to fit everybody. In creating my own steps, I thought carefully about young people who:

  • Are starting from scratch, often with modest incomes.
  • Have ever-increasing debt loads.
  • Cannot rely upon pensions (and possibly social security) to provide retirement income.
  • May not own a home or have kids for many years.

This process is designed to create financial stability by building cash savings for emergencies, making saving for retirement a habit as soon as possible, eliminating consumer debt, and learning to save and invest for specific life goals.

The system doesn’t specifically focus on things like paying down a mortgage or saving for children’s education because those steps don’t apply to everyone and are less likely to apply until later in life..

Finally, you might be surprised to see the emphasis I place on retirement savings. After all, I recommend you start putting something away in a retirement account even if you have credit card debt and then contribute to a Roth IRA at the same time you save for emergencies!

This is because I know so many people working through retirement because they didn’t save earlier in life. And I also know that only about 10 percent of my friends were actively saving for retirement in their 20s. All of this despite the fact that every dollar you save in your twenties will grow exponentially thanks to compounding interest. So I think you should start saving for retirement ASAP. Start small, but start now. And, basically, we should always be saving for retirement in conjunction with our other goals. It can’t wait.

What do I mean by financial security?

To me, financial security means:

  • Having enough money coming in to meet all your needs, with enough left over for savings and “fun”
  • Not carrying high-interest consumer debt
  • Having enough money in your emergency fund to get you through six months if you lose your job.

Financial security is a more attainable goal than financial independence. Financial independence means different things to different people. Some might think of it as simply not needing to rely on help from parents or others to pay your bills. But in the world of finance, financial independence means you can live solely off the interest on your investments. In other words, you no longer have to rely on working for your income. Although I think we all aspire to financial independence, those who even have a shot at it are in a very privileged situation.