The 6 + 1 System For Financial Stability

You want to control your money, but where do you start? The 6 + 1 System provides seven easy-to-follow steps for achieving financial stability: No consumer debt, rainy-day savings and the ability to save cash for both retirement and life goals like vacations, cars and your next home.

How do you go from being flat broke to achieving — if not wealth — a state of financial comfort, freedom, and security?One step at a time.

6 + 1 System, Step 1: Build a Buffer

1. Build a Bank Account Buffer

Whether or not you’re dealing with credit card or other personal debt, if you’re living paycheck-to-paycheck, one big bill or a week of missed work could be all that separates you from financial disaster.

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 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.

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.

6 + 1 System, Step 2: Start saving for retirement

2. Invest a token amount for retirement

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 and 5 percent of your salary towards retirement is a good start. Once you’re out of debt, you’ll want to increase this percentage substantially.

6 + 1 System, Step 3: Pay off bad debt

3. Get rid of “bad” debt

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.

6 + 1 System, Step 4: Save for emergencies

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).

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.

6 + 1 System, Step 5: Save for something you want

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.

6 + 1 System, Step 6: Invest and donate

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.

+ 1. Create an additional stream of income

Follow the six steps above and you WILL achieve financial freedom. But depending on how much debt you have an how much you earn, it may take a long time.

If you’re serious about accelerating your wealth, the “Plus 1″ step in the 6 + 1 System is the most important. The Plus 1 Step is creating a side hustle: Another source of income outside your day job.

Earning more money will always be a quicker way to your financial goals than trying to spend less.