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Getting Started on the Four Stages of Financial Growth

Last week, I introduced you to a fictitious couple called John and Jane Mills.  On the surface, this young couple looks like they are living an idyllic middle-class life. But under the surface, they are Struggling in their financial growth.  With a combination of cash flow and debt issues, their financial lives are a source of constant stress in their marriage and they need help to turn things around.

As promised last week, in today’s post, I will provide some practical suggestions on how the two of them can begin the path of improving their financial stewardship.  At the core of my recommendations is what I call The Four Stages of Financial Growth.  Regardless of where you are on the Five Levels of Financial Being, you will always use these stages to help you move up in your wealth cycle.

The Four Stages of Financial Growth are:

  • Spending Control – the most fundamental skill in wealth building is learning how to effectively manage the money that you already have.  Before you can work on any of the other steps you need positive cash flow – which comes from having some money left over after you have paid for all your expenses.
  • Debt Elimination – trying to build wealth while still in debt is a losing plan because a portion of your cash flow is always allocated to somebody else’s agenda.  That’s why I focus so much energy on helping you master this step.
  • SaVesting – this is the combination of Saving and Investing.  I don’t believe that you have to build up a huge savings fund before it is okay for you to invest because doing so makes you miss out on one of the most important elements to investing: time.
  • Building Your Wealth Machine – once you have the first three stages under control, this is the most fun part – putting your money to work in the right vehicles.

For the Mills couple to turn their situation around, their main focus should be on the first two of the four stages.  As I described last week, there are a few issues going on that are hurting them financially.  John has a large college debt obligation that significantly eats into their monthly cash flow and they are making this situation worse by living beyond their means.  They make up the difference by racking up credit card debt.

Harness Spending with a Budget

The first thing I recommend for them to do is to sit down together and create a budget.  I can tell from their situation that they either don’t have a budget or they have one but don’t follow it.  They will probably resist this step because, like most people, they think of a budget as something that constrains their ability to enjoy life.  In reality, it is actually the opposite.  Life is much more enjoyable when you are proactively telling your money what to do.

There are no magical templates for creating a budget that will suddenly turn things around for them.  It is the exercise of looking at every dollar that comes into their household and prioritizing how it is spent that will help them to start making better choices about how they spend money.  I describe the process of creating a budget that works in my book, The Wealth Cycle.

Free Up Cash Flow with Debt Elimination

After they have figured out where they are spending money and done some reprioritizing, they will most likely find that they can create some extra cash flow each month, just by being better about telling their money what to do. Instead of using that extra money to go out to dinner or on a trip, the most strategic thing they can do is use it as the starting point for creating a debt eliminator to pay off their credit card and student loans.   I will go into the details of how to do this in a later post.  In essence, they will start with their smallest debt and pay as much over the minimum payment as they can so that they accelerate its payoff.  Then they will use the newly freed up cash flow from paying that debt off to work on their next biggest debt.

Working on these two items will take John and Jane some time and if they are diligent with the process, they will see their relationship with money transform into an area of joy in their marriage instead of a cause for stress.

Next week, I will fast forward the Mills story to show you how they successfully move their financial growth from Struggling to Steady, and what they can do to start working on moving to Solid.

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