For many students, math can be one of the most difficult classes. Fortunately, many of our teachers helped us learn with clever mnemonics. One of the most common mnemonics was “Please Excuse My Dear Aunt Sally” or PEMDAS. PEMDAS (Parentheses, Exponents, Multiplication & Division, Addition & Subtraction) was a savior in math class and helped me remember the order of operations.
Unfortunately, the order of operations related to creating your wealth is rarely taught and doesn’t have a neat acronym. The following article provides a general order of operations to create wealth. Like in life, each person’s path will be different, and so will their savings journey.
At Paradigm, we’re here to make sense of the confusion and guide you down your personalized savings journey. Building your wealth can often be intimidating and seem like a distant dream.
However, if you focus on the short term and what you can do today, you’ll be far ahead of your peers. To do so, remember this phrase:
Brave Explorers Encounter Hidden Gems, Locating Massive Treasures
B: Budgeting and Goal Setting: Budgeting is a word that often makes people cringe. However, creating and sticking to a budget can be one of the most impactful components of creating your wealth. It allows you to establish a routine of consistently saving each month. Your budget often reflects your goals, even if they aren’t building your wealth.
It will show you where your hard-earned money is spent and how much. If creating wealth is not your goal, your budget will show it. Without a goal, you can begin to question, stumble, and falter. Goals hold us accountable. Goals give us a reason to keep going. Goals help us when we can’t see or forget why we are doing what we are doing.
Without goals, we’d be floating in space like an astronaut whose tether disconnected from the space station.
- Next Steps: Create a budget. There are a plethora of templates or apps available. The Paradigm Team also has a budget template and can help create your budget with you. For those who are married, budgeting is a great date night when paired with a glass of wine! While creating a budget, also begin developing your goals. Think about what you want to do with your wealth and what you want your wealth to accomplish. Goals don’t always need to be financial, either!
E: Emergency Fund: One of the most critical steps towards creating wealth doesn’t involve investing money in a retirement account. It’s building an emergency fund. This bucket of funds should typically hold between 3 and 6 months of living expenses.
Your emergency fund will help you pay for any surprise expenses or cover your basic expenses if you lose your job. It will also allow you to continue saving each month, even when big expenses arise.
- Next Steps: Evaluate how much you currently have in your emergency fund. If you already have around 3-6 months of expenses saved up, great! If not, that’s okay! By setting aside a small amount each month or paycheck, you can grow your emergency fund fairly quickly.
- Bonus Points: To maximize your emergency fund, we suggest holding it in a High Yield Savings Account (HYSA). Doing so will ensure that your money is still working for you! Most HYSAs are currently yielding over 4%.
E: Employer Savings Plans: Did you know that up to one in four people with access to an employer retirement plan, such as a 401(k) or 403(b), are leaving FREE money on the table? You’re probably wondering how this could possibly be the case. After all, we all love FREE money. In this case, we’re referring to participants of employer retirement plans who are not taking advantage of their employer’s matching contributions. Most workplace retirement plans offer some sort of employer matching contributions.
· Next Steps: Review your workplace retirement plan’s benefits. If you’re offered employer matching contributions, make darn sure you’re receiving them! Paradigm will make a point to help you make sure nothing is being left on the table. We don’t want you missing out on any FREE money!
H: High-Interest Debt: Again, another step towards creating wealth is not investing but identifying your current debt. Debt can have a crippling impact on your current and future wealth. One of the most critical components of your debt is the interest rate. Whether the interest rate is 2% or 20% makes a massive difference in the short and long term. Typically, consumer debt (like credit cards or other personal debt) holds a higher interest rate. Paying off high-interest debt saves you a lot of money in the long term, allowing for more flexibility with your savings. We want compound interest working for you, not against you.
- Next Steps: Take inventory of your debt. Start by identifying your debt and the associated interest rate for each item (Mortgage, Vehicle, Student, Credit Card). From there, Paradigm can help you develop a strategy to maximize your money.
G: Goals-Based Saving: The next step of your wealth creation journey is establishing a monthly savings amount. Here’s where your budget really comes in handy! The easiest way to do this is by saving a certain percentage of your monthly income. This percentage will vary depending on your age, goals (see here’s where the goals you developed come into play), and several other factors. However, we suggest working toward saving 20%. As you get more comfortable with your savings, gradually increase the savings amount as your income increases. Think of it as paying yourself first! By paying yourself first, you can help avoid lifestyle creep and ensure “future you” are cared for. If you are already saving more than 20%, that’s great! We can help you optimize your savings. If 20% is a little steep, that’s okay! Start small and try to increase from there. Remember, “The best day to start saving was yesterday, and the second-best day is today.”
- Next Steps: Identify how much you can comfortably save each month. You don’t want to stretch yourself too thin each month trying to hit a saving goal. If you need to start below 10%, that’s okay. The most important thing is that you’re starting to save. And, if you need help determining a prudent saving percentage, Paradigm is here to help!
- Bonus Points: Optimize your savings. This sounds great, but what does it really mean? Well, depending on your income, employment, and age, different investment accounts are available to fund your goals. In fact, some investment accounts are specifically designed for certain goals, like a 529 account, which is tailored to educational expenses. At Paradigm, we make it our responsibility to optimize your savings strategies. We will help you determine which investment accounts best match your desires and aspirations. Typically, people have multiple investment accounts to fund their goals and provide tax bracket flexibility.
L: Low-Interest Debt: Once you’ve implemented a prudent savings strategy, you might find yourself wanting to get further ahead in your financial life. Enter low-interest debt. But which debt is considered low-interest? Here’s where we return to the debt paydown strategy we developed in step 4. As a general rule of thumb, we’re looking for interest rates below 6%.
- Next Steps: Attack your low-interest debt. Continue working through the debt paydown strategy we developed. Similarly to the savings strategy we developed in step 5, don’t stretch yourself too thin. By the time you’ve made it to this step, you’re already way ahead of the game!
M: Max it Out: Once you have begun consistently saving and investing funds in your accounts, max it out. What do we mean by that? Most investment accounts have an IRS-determined limit for the maximum amount of money you can save in that account for a given year. Contributing the maximum allowable amount each year ensures you are making the most out of all your accounts. The maximum amount fluctuates between account types and can increase once you turn 50. Many retirement accounts include a “catch-up” provision for those over 50. In 2024, this provision allows you to save up to an extra $7,500 beyond the maximum amount in your 401(k) account.
If you’ve made it this far in your investing journey, congrats! You are doing more than most people. According to a Vanguard study, “around 15% of 401(k) participants maxed out their 401(k) in 2022.”
- Next Steps: Based on your investment account types, begin increasing your contribution until you “max out” your accounts. Paradigm can help you max out your investment account and determine the next best steps. There are always extra avenues you can use to save more.
T: Consistent Tracking: By going through these steps, you will have placed yourself directly on the trajectory for accomplishing your goals. But this isn’t a one-and-done event. You need to hold yourself accountable and constantly re-evaluate your goals. At Paradigm, we will make it our job to continually discuss your goals. We will use your first go-around as a benchmark and track your progress each year as you move closer towards your goals. By benchmarking, you will see the real impact of your efforts, and it will likely motivate you more.
- Next Steps: Write down what you did and where you are at. Together, we will continually revisit your progress and compare where you are to where you began this journey.
As mentioned above, everybody’s wealth creation journey is different, and while this provides a great general outline, it will not be a perfect match for you.
This guide will help you put your foot forward in the right direction, but for specific savings and wealth creation strategies, reach out to Paradigm and ask us, “What more can I do?” or “What should I do next?”
After all, Paradigm’s goal is to help you create the financial wherewithal to pursue and fulfill the life of your dreams. So why not create it together?