The Simple Secret to Building Wealth & Paying Down Debt - MBA sahm (2024)

Building wealth and paying down debt – the unattainable goal that most of us statistically never reach – is ironically very, very simple. Foolproof even. In fact, I think one of the biggest reason that most people don’t build wealth (or pay down debt) is because the real solution, the one right in front of them, is just too simple. It’s boring. It’s slow. It isn’t glitzy and it’s not something to write home about.

But it works.

So what’s the too-good-to-be-true solution?

You automate your wealth creation(or debt repayment). And you do that by automating your finances.

This includes:

• Savings accounts – for emergencies as well as large purchases.
• 401Ks – If your company offers a matching contribution, you should always contribute enough to get the full match. If you don’t, it’s like passing up on a raise.
• IRAs – These are especially important if your company does not offer a 401k. There is a cap for how much you can contribute each year, so your ultimate goal should be to hit that (right now, it is at $5,500 a year).
• 529s (for each child) – 529s are tax-deductible accounts that can only be used for education. They can save you a lot of money in the long run and are the best vehicle for helping your kids pay for college.
• UTMAs (for each child) – These are accounts in the name of your child that you have control over. They don’t have the tax shield that 529s do, but it’s a great way to save for your kids’ non-education expenses.
• Brokerage account – For long-term investments that aren’t required to wait for retirement. I use TradeKing and have been happy with them for years.
• Health Savings Account (HSA) – These are especially important if you’ve got a tight budget. You’ll be thanking yourself when you’re hit with a big medical bill.
• Credit card points – Instead of using credit card points for freebies and travel perks, use them to pay down debt or add to other personal investments. It’s a great way to get extra money for basically doing nothing.
• Bill payments – You never want to pay a finance charge because you missed a bill.
• Insurance payments – Same as with bills…only more important!
• Extra principal payments on all loans – This is truly the only way to pay off your loans early. Even a small amount will make a huge difference in the long run!

Related post: Why You Need to Set up a 529 College Savings Plan for Your Kids

It seems like a lot and you may not have all of these accounts created right now, but it is absolutely critical to set each one up and start automating payments immediately.

Why Automation Is Critical

Before you tell me all the reasons why you won’t start this right now, consider these things:

• You deserve to be paid first. You work your BUTT off. You are truly your best advocate, closest friend, biggest admirer. So why do your personal investments come behind Verizon, Bank of America, Acme, and Geico? You work very hard for your money, so you deserve a portion of it to go towards your retirement, your children’s future, and your own personal security. Treat yourself like a debtor and pay yourself first.

Related post: 14 Different Ways to Save for Retirement

• You only need to start automating $25 a month. I’m serious about this! Most people think that’s too small of an amount. The math just doesn’t work out. But I’m telling you – I promise you! – it is all you need. Once that is set up, it will only grow. It is going to motivate you and enable you to find more money. And if your bank won’t allow $25, then set it for $50 every other month. You just need to start, because…

• The hardest part is the first step. After that you don’t have to DO anything. Your money will be growing and you will be able to focus on finding more money to increase that initial $25 automation. That is why it is ok to start with $25. Honestly, you could start with $5! You just need to start. 95% of the battle is taking the first step.

• The sooner you start, the more “free” money you get. You’ve heard the compound interest story before. When your money is in almost every kind of investment, it will grow over time even without you adding to it. This means the sooner you start, the more (of the bank’s money) you will have in the long run. You are basically getting paid more to start early.

Once every possible account has been automated, you can stop thinking about making each contribution and start focusing on how you will increase each contribution. This can be fun, easy, and take as little or as much time as you want. What is great is that while you are working on making more money, saving more money, and ultimately increasing your automated contributions, your wealth is growing behind the scenes! It’s like you’ve added an assistant to your life whose only goal is making sure that you are fulfilling your dreams each and every month.

Now that your initial automations are set up, your only goal is to slowly (but surely) increase the contribution amount for each automation. There are typically two ways to do this -MAKE more money or SAVE more money – but there is also a huge third source: REALLOCATE money. Let’s start there:

Reallocating Money

Here’s what I mean by reallocating your money:

Imagine we’re looking at your very simplified budget. Each month your money is being spent on 4 main areas – personal investments (the automations you just set up), bills, debt, and luxury & other expenses. Since the ultimate goal of building wealth is to have the most possible money funneling towards your personal investments, that is what we want to grow. Reallocating money means we take money from one of the other 3 sources and send it straight towards our personal investments. By doing this, you don’t need to make more money or save more money. You just need to be creative (and smart).

There are a few different ways to do this, but without a doubt you want to start here:

The Snowball Method of Debt Reduction

The snowball method is simple – pay off your smallest loan first. Ignore interest rates. Just focus on knocking out the smallest loan. Once that is done, guess what you have – a big chunk of money (from the monthly payment of that loan) that can now be reallocated somewhere more important. This is cashflow that you have created without actually making more money or saving more money.

And what are you going to do with that extra money? Two things – 1. Increase your personal investment automations, and 2. Increase your monthly payment for the next biggest loan. See how the snowball starts??

Related post: How to Pay Off Your Student Loans Early

Other Sources of Reallocation

While the snowball method is definitely the most obvious (and effective) method of reallocation, here are some other great ways to find money without actually giving anything up:

• Cable – Nowadays, cable is as big of a scam as bottled water. There’s just no need for it! You’re likely paying well over $100 for your monthly cable bill. Think about the things that you watch and consider the other sources that you can find those exact same shows, plus even better ones. Netflix is $8/month, Amazon Prime is $8-$10/month, HBO Now is $15/month. Pretty much every premium channel these days has their own subscription service and most news programs can be found on the internet for free. Invest in those services, cut your cable bill, and reallocate the savings towards your personal investments.

• Car Insurance – If you haven’t checked into your car insurance account lately, try logging in and see if you’re eligible for a rate decrease. If you go without any accidents, every few years they will lower your rate, BUT you have to log into your account to ask for it. Also, check to see if they will give you a discount for automating your payments. Many insurance companies will do that and it’s easy money!

• Private Mortgage Insurance (PMI) – This doesn’t apply to everyone, but if you were required to get PMI with your mortgage, then you should definitely prioritize paying off enough of the principal to get rid of the PMI. This usually means bringing your principal down to about 80% of the house value, which really isn’t that much. And it will likely free up almost $100 a month to be reallocated elsewhere.

Saving Money

This is the part of building wealth that no one wants to do, but it’s a serious, huge secret of the rich – you can build a ton of wealth by just being frugal. Here’s the great thing – once you start watching your money grow, you will experience a surge of motivation that will make you enjoy being frugal. I’m telling you, building wealth is addictive. You will literally experience a high when you discover a new way of saving money.

There are endless ways of saving money and I’m constantly coming across new ideas every day, but here are some of the classics that are sure to save you money:

• Stop eating out and start cooking at home.
• Plan your meals on a weekly (if not monthly) basis.
• Turn down your thermostat in the winter and turn it up in the summer.
• Unplug unused appliances.
• Shop at your favorite stores only when they’re holding sales (or start shopping at the outlet stores).
• Watch movies on Netflix instead of going to the theatre.
• Only pay for groceries that are on sale. Stockpile what you can.
• Instead of buying books, go the library, sign up for Bookbub, and watch for free Amazon promotions (but KEEP reading!).

Making Money

This is the most obvious form of building wealth, and often it feels like we have the least amount of control over this area. But that just isn’t true! If you want to seriously build wealth or pay down debt, then you need to consider other means of making money.

This doesn’t necessarily mean that you need to moonlight in the evenings or take on a part-time job over the weekends…unless that will make you happy. But you should spend some time doing a little bit of research to find out all the options out there. I recently came across a great quote that I couldn’t agree more with: “You should always have at least 3 hobbies: 1 that makes you money, 1 that makes you healthy, and 1 that makes you creative.” Find that hobby.

Here are some great ideas and resources for side income sources:

• Teach online courses in your area of expertise.
• Sell all of your old textbooks (or other books you don’t need any more).
• Sell your photos online.
• Design and sell funny T-shirts (there are sites that handle all of the fulfillment for this).
• Sell handmade crafts on Etsy.
• Become a dog walker or pet sitter.

Related post: 50 Ways to Make Money as a Stay-at-Home Mom

Building wealth and paying down debt is 100% attainable for all of us, we just need to prioritize it and make smart decisions. If you really try hard, it will usually end up being FUN. And isn’t that the ultimate dream??

If you’d like more tips on saving money, making money, getting out of debt, and reaching early retirement, subscribe to my Financial Freedom Mailing List for notification when new posts are published. Or, if you want to receive notification for all new posts from MBAsahm, join my Main Mailing List and receive tips on living a fulfilled life, parenting, and raising happy kids in addition to achieving financial freedom. I hope you enjoy everything you read! Thanks for your time!