Sometimes with the hectic pace of life, it can seem like we are on a thread mill running faster and faster, trying to keep up. As a result, the idea of building wealth may seem elusive and very distant.

But a path can be followed to build wealth and secure your financial future. It is not always quick, but taking small but consistent steps down this path will lead to a more secure financial future.

Here are the ten steps on the path:

1️. Track Income and Expenses

If you are in the financial wilderness, unclear about what is going in and out of your bank account, if your money runs out before the end of the month, and you are constantly living in your overdraft at the bank, then this is where you need to start.

If looking at your spending scares you, you are worried about what you might uncover, or deep down, you are in denial about your spending, then taking this step is important.

For some, with the cost of living crisis and inflation, it is easy to put your head in the sand and behave like the proverbial ostrich, but understanding where you are is an essential first step.

So how are we going to take the first step?

First, log on to your online bank account and download three months’ records from your accounts.

The next step is categorising each item as an expense or Income and then categorising by type of spending, e.g. bill, subscription, loan, general spending etc.

I have included an example of how to do this below. It doesn’t matter how you do this, but I use Notion, a fantastic piece of software whose basic functions are free. If you have not found Notion, it is worth checking out.

Once you have done this, there are two important steps:

Check what your average Income vs average expenses is and check whether that number is positive or negative
Look at your categories of spending and filter them from most expensive to least

Although this may be time-consuming, this should give you a good idea of where you are and exactly what you spend your money on. This will provide a good basis for the next step, which is:

2️. Optimise Income and expenses

If the number in step one is positive, this is a good starting point. If it is negative regularly, you need to take urgent steps to ensure this is neutral or a little bit positive. With the economic environment the way it is, this can be difficult, but trying to take at least some control will help.

There are only two ways to reduce expenses or increase Income. However, even if your income is fixed, there is always a way to increase your Income marginally. For more on types of Income, see my article on medium:

For most people, however, the main way of making their cash flow positive will be by reducing expenses. There are two schools of thought in this area. One is the minimalist approach, saving every penny, cutting the lattes and living minimally to save money. Others, such as Ramit Sethi, suggest cutting spending on things that don’t matter to you. But rather than cut everything to the bone to live a rich life, spend on things that improve your life. So if that Latte every morning matters to you, and brings you joy, then keep doing it. I recommend looking at his approach:

Or, if you want to start now and save money, there is a free book summary on my blog (email required):

3. Build a short-term emergency fund — 1 month

Once you have developed a positive cash flow, no matter how small, it is time to start building out.

The first step to any financial plan is to set aside some money in case of a problem. Although most authors and advisers recommend 6–12m (post-pandemic)but this can seem like an unachievable goal to many. The best place to start is to have a one-month emergency fund in case you lose your job, get made redundant or are unable to work due to illness.

The two key issues are how much do I need? And where should I store it?

To calculate what you need for one month, go back to the spreadsheet in stage one and work out only what needs to be paid, mortgage, gas, electric, food shopping etc. Take away every that could be considered a luxury or not required. Imagine locking yourself away in the house, with no TV, internet or connection to the outside world. What would you need to survive for one month? That is what you should be aiming for when it comes to your one-month emergency fund.

In the past, keeping this in a low-interest cash saving or current account would be normal. However, inflation stands at 10.9% when writing, eroding your fund. For example, if you started with £3000 as an emergency fund at 0% interest, it would be worth £1684 in 5 years if the inflation stayed the same. The key here is to be liquid, which means getting your money in a hurry if needed. A low-risk cash ISA with some return or savings account with a higher interest rate would be a good idea, provided the interest rate is not dependent on you leaving your money in for a set time.

4. Calculate Net Worth

Once you have optimised your Income vs expenses, it is time to work out what you are worth. This is the difference between being rich and being wealthy. This idea was first popularised by the book The Millionaire Next Door, which described being rich as having a high income and being wealthy as the amount of money in the bank.

Your Net Worth will tell you how wealthy you are and can be worked out by adding the sum of all your assets minus all your liabilities.

To understand the difference between assets and liabilities, read my article:

5. Pay off bad debt

If you’re struggling with bad debt, you’re not alone. Credit card debt is a major problem for many, and it cannot be easy to pay. So the first step is to understand your debt. In addition, credit card companies typically charge high-interest rates, so you’ll need to focus on paying off your cards with the highest interest rates.

You should also take a close look at your spending habits. If you’re using your credit cards to buy things you don’t need, it’s time to cut back. Once you’ve taken a close look at your debt and spending habits, it’s time to develop a plan to pay off your debt.

There are a few different ways to do this, but one method is to transfer your balance to a credit card with a lower interest rate. You can also try negotiating with your credit card company for a lower interest rate. If you’re serious about getting out of debt, several organisations can help you develop a plan and get started on the road to financial freedom.

6. Build a longer-term emergency fund of 3–12m

For most of us, life is relatively predictable. We go to work, pay bills, and enjoy leisure time without too much excitement. But now and then, something happens that throws our lives into chaos. Illness, job loss, or natural disasters can all lead to financial difficulties, and without an emergency fund, it can be difficult to weather these storms.

Building an emergency fund is key to protecting yourself from financial disaster. Ideally, you should aim to have 3–12 months of living expenses saved to cover your costs even if you lose your Income. This may seem daunting, but even starting with a small amount of money can make a big difference. If you are already struggling to make ends meet, you may need to focus on building up your emergency fund before you can start saving for other goals.

Remember that an emergency fund is for unforeseen events only. You should not dip into it for non-essential purchases or vacations. Once you have built up your emergency fund, it will act as a safety net in the worst-case scenario. Having this financial cushion will give you peace of mind and help you weather any unexpected storms that come your way.

7. Understand your pension provision

Most people know that pension provision is important, but many do not understand the full extent of its importance or how to make the most of their pension provision. Pensions are a key pillar of financial planning, and understanding your pension provision is crucial to building a financial plan that will secure your future wealth.

There are many types of pension provisions, each with its benefits and drawbacks. Therefore, it is important to understand the different pension provisions to make the most of your pension.

Financial education is the key to making informed decisions about pension provision. Many resources are available to help you understand your pension provision and make the best choices for your future. With careful planning and a little research, you can ensure that your pension is working hard for you and helping you achieve your financial goals.

If you want to know more about types of pensions, then more information can be found below :

8. Start to build assets

When it comes to building assets, there are a few different options to consider. Of course, stocks and shares are popular choices, as they offer the potential for high returns. But, of course, stocks can also be volatile, so it’s important to understand the risks involved.

Property is another option, and while it may not offer the same potential for growth as stocks and shares, it is typically more stable. There are often short-term fluctuations, but it can offer long-term capital growth and Income.

Digital assets are a newer option, and while they come with some risks, they can also offer high returns. They include cryptocurrency (e.g. Bitcoin) Whatever option you choose, it’s important. In addition, they research and understand the pros. and cons of each before making any decisions.

9. Monitor Net Worth

Monitoring your net worth is an important part of maintaining your financial health. By keeping track of your assets and liabilities, you can clearly understand your financial situation and set goals for building wealth. Assets include everything from savings and investments to your home equity.

On the other hand, liabilities include debt, such as credit card balances and student loans. Your net worth is simply the difference between your assets and your liabilities. By regularly monitoring your net worth, you can get a clear picture of your progress towards financial goals and identify any areas where you may need to make changes.

Having a method for monitoring this every three months is crucially important. Another important consideration is ensuring enough liquidity in your wealth building for planned or unplanned future events. An example of this would be ensuring you have enough money in your ISA vs your pension to access this if needed. This does not mean you should dip into this when needed but consider the liquid element of your investment plan and something that cannot be touched.

10. Calculate when you can retire

For many people, retirement is the ultimate goal. It’s when we can finally put our feet up and relax after years of working hard. But to retire comfortably, it’s important to plan and ensure we have the financial means to support ourselves.

One way to calculate when you can retire is to look at your age and current savings. For example, if you’re hoping to retire by age 60, you’ll need to save enough money to cover at least if20 years of living expenses. This may seem daunting, but there are several ways to achieve financial freedom.

Start by looking at your current expenses and lifestyle. Can you make some changes that will allow you to save more money? Once you’ve identified ways to save, start setting aside money each month into a retirement account. If you’re disciplined about saving now, you’ll be on your way to achieving financial freedom later.

Actionable Steps

Figure what stage on the ten steps pathway you are on
Start to improve your financial education in that area and form a plan for getting from that step to the next as quickly as possible
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Good luck on your journey!

Diarmaid