Learn the 12 Steps that will help you eliminate debt and build wealth. Start by building a foundation, then a routine, and finally, a legacy.

The Time is Now

It is time. You have put it off long enough. You need to eliminate your debt. And, you need to start building wealth. There have been enough excuses, hiccups, roadblocks, and detours. It is time to get serious.

2020 has been a tough year for so many. A global pandemic came in and turned everything upside down. Some parts of the economy shut down temporarily. Other parts may never recover. And, there are other sectors where economic activity boomed more than ever.

In the US, the number of unemployed people went up 5x in just two months. 2020 was no time to live without an emergency fund.

At the same time, the stock market dropped by 35%. 2020 was no time to be an investor if your strategy didn’t include what to do during a market crash.


The Wolf is at the Door

Remember the Three Little Pigs? One built a house of straw, one of sticks, and one of stone. The Big Bad Wolf came along and ate the first two pigs. But, the third pig had built a strong house, and the wolf couldn’t get in.

Be the third pig.

I have a 6-month emergency fund. I could literally have zero income for a half-year and it would not change my life in any way… except I’d have to rebuild my emergency fund. My financial house is strong.

My investment strategy is built on profiting from both good and bad times. By simply rebalancing earlier this year I increased the total number of shares I own by about 15%, without adding a penny of new money. My financial house is strong.

I am the third pig.

I want you to be the third pig too.

When you decide enough is enough, and you want to get serious about taking control of your finances, then this article is for you. Below, you will find the 12 steps that I used to get out of debt and build wealth. They absolutely worked for me, and I am excited to share them. I’m willing to bet they will work for you too!

12-Steps in 3 Phases

The Practically Independent 12-Step Plan to Eliminate Debt and Build Wealth is broken into three phases.

Phase 1: Build a Foundation

Few things are more frustrating when doing a project than having to go back and repeat steps. Therefore, before we get into the advanced stuff (like investing) we need to take care of the basics. That way, when something unexpected comes along, we can deal with it and not have to go back into debt.

Phase 2: Build a Routine

When you have a strong foundation, the next step is to get into a natural rhythm. That way, as time passes, you are consistently and repeatedly shrinking your debt and increasing your net worth. This is a routine that will last the rest of your life.

Phase 3: Build a Legacy

After you have mastered your routine and permanently evicted non-mortgage debt, it is time to start living the good life. Big dreams call for big plans, so we need to take care of the big stuff and start thinking about leaving a legacy for future generations.

Phase 1: Build a Foundation

A strong house can only be built on a strong foundation.

Step 1: Create an Undetailed Budget

I hate building a detailed budget. I don’t know anyone who has a detailed budget and successfully sticks with it. Instead, I use the Undetailed Budget. After you use your Income to pay your Recurring Expenses, whatever is left is your Discretionary Income. And, your Discretionary Income can only be used in two ways: Personal Spending or Savings.

Income, Recurring Expenses, Discretionary Income, Personal Spending, and Savings. There are just 5 numbers in the Undetailed Budget. You can control 5 numbers. It doesn’t have to be overwhelming or complicated.

Do step 1 before anything else.

Step 2: Separate Income and Expenses

Everyone I know has their pay deposited into their checking account. Then, they either automatically save at the beginning of the month, save at the end of the month (if there’s any money left), or don’t save at all. Gross.

I prefer to have all income from all sources deposited into Savings. Then I only take out what I need with a few, pre-planned withdrawals per month. Of all the steps, this one will cause the biggest change in your behavior. Absolutely do not skip Step 2.

Do step 2 after step 1.

Step 3: Save 1-Month Emergency Fund

After using the Undetailed Budget to find room for savings in monthly cash flow, it is time to build a cushion. From your Undetailed Budget, add your Recurring Expenses to your Personal Spending, and that is how much you need to save to have a 1-month emergency fund.

I know that a 1-month emergency fund is not good enough for a long-term safety net. It is not intended to be. At this point in your journey, we are just trying to avoid back-sliding into more debt as you are paying off the debt you have. But, at the same time, we want to deploy as many of your resources as possible to make progress on your goals.

A 1-month emergency fund is a nice balance. With it, you can have a bit of cushion while you eliminate your high-interest debt. Then, when they are gone, you come back and boost your emergency fund to a long-term level.

Complete step 3 before starting step 4.

Step 4: Eliminate High-Interest Debt

After you have a 1-month cushion to protect you in the case of an emergency, it is time to tackle your high interest debt. (Learn more about debt buckets and priorities here). Continue to make the minimum payment on absolutely every debt you have, except the one you are focusing on. Then, pour every penny you can find on that one debt and eliminate it as fast as possible. Then move onto the next debt.

Step 4 can be intense. And, maybe it should be. High interest debt is a massive drain on your finances. You are giving your hard-earned money to banks, and you’re broke! The goal is to get through step 4 as quickly as possible. That means cutting your Personal Expenses to a minimum. It may mean trimming your Recurring Expenses if possible.

It will feel like you’ve given up the fun of life in step 4. Use that as motivation to get out of step 4 as quickly as possible!

Complete step 4 before starting step 5.

Phase 2: Build a Routine

You have built a foundation and eliminated high-interest debt. You are a rock star. Now turn that progress into new habits.

Step 5: Review Insurance and Wills

Every adult needs a Will. Otherwise, your family won’t know your wishes. Do your family a favor and get a Will. I prefer to wait until after you eliminate high-interest debt until getting a Will because, even though they are not super expensive, Wills are not free. I don’t want you creating a new bill until you have completed Step 4.

But, as soon as you make that last high-interest debt payment, create a Will.

Some people also need life insurance. Now that you have no high-interest debt, it is time to determine who would be financially harmed if you were to die unexpectedly. Then, get term insurance on yourself to undo that financial harm.

After step 4, revisit step 5 once each year.

Step 6: Get Employer Match for Retirement

Now that high-interest debt isn’t draining your finances dry, you can divert a small portion of your salary into retirement. At this step, only do this if you receive an employer match. And, only enough to get the full match. We’ll contribute more to retirement in Step 9.

Continue step 6 until reaching step 9.

Step 7: Save 6-Month Emergency Fund

That 1-month emergency fund was just triage to get you through. Now, it’s time to beef it up.

Add your Recurring Expenses to your monthly Personal Spending from your Undetailed Budget and multiply that by 6. Round up to the nearest $100 or $1,000, and that is your new goal for an emergency fund. Put whatever you were using to eliminate high-interest debt toward savings until it is fully funded.

Continue step 6 while doing step 7. Complete step 7 before starting step 8.

Step 8: Eliminate All Non-Mortgage Debt

After your 6-month emergency fund is fully funded, you can work on your lower-interest debt bucket. Pay this stuff off, and never go into non-mortgage debt again.

Now that all of your debts have relatively low interest rates, you get to decide whether to use the Debt Snowball or the Debt Avalanche. The Debt Snowball (attacking the smallest debt first) will allow you to knock out a little debt fast, see progress, and stay motivated. But, the Debt Avalanche (attacking the highest interest rate first) will reduce the total cost of interest across all your debts.

But, because at this point all of the rates on your debts are pretty low and fairly equal, there really isn’t much difference between the two any more. So, pick a debt you hate and pour every penny you can on it. When it’s gone, move on to the next one.

It’s possible that knocking out your debt significantly decreases your Recurring Expenses. If that happens, go back to step 7 and re-calculate your emergency fund. If there is extra in your emergency fund, deploy it to your next goal.

Continue step 6 while doing step 8. Complete step 8 before starting step 9.

Phase 3: Build a Legacy

At this point, all non-mortgage debt is paid off. Your only debt payment is your house. It’s time to add some goals.

Step 9: Invest 15% of Gross Income for Retirement

Now that you have eliminated consumer debt, it is time to beef up retirement. Divert a full 15% of your gross income into retirement accounts. Get your employer match first, then fill up a Roth, then back to your employer match if you’re still not at 15%.

Continue step 9 forever. (That’s right, even during retirement).

Step 10: Save for College

After you’ve put 15% into retirement, you can start putting money away for your kids’ college. Determine how much you are willing to contribute toward their education and invest it in a 529.

That’s right: if you don’t have any retirement savings, you should not be saving for your kids’ college. Why? Because if you retire broke, you will be a bigger burden on your kids than it would be if they had to find their own way to pay for school.

Want to provide your kids with a quality education? Great! Start with this lesson: put your own oxygen mask on first, then help others.

Continue step 9 during step 10. Continue step 10 until college is fully funded or all kids have graduated.

Step 11: Use HSA to Self Insure for Long-Term Care

If you have completed steps 1 through 10 and you still have available cash flow and you are between the ages of 30 and 55, it may make sense to use an HSA to Self Insure for Long-Term Care.

This step is not right for everyone, so do your research.

Continue step 9 and 10 during step 11. Continue step 11 until Long-Term Care is fully funded.

Step 12: Pay Off Mortgage

When you have allocated a reasonable amount to steps 9, 10, and 11, then you should still have some left for increased lifestyle, and adding extra principal to your mortgage. There is no reason to keep a mortgage around forever.

I know, it’s popular to keep your house leveraged so you can invest. But, I’m telling you, having a paid-for house changes you. You spend different, you earn different, you talk different, you walk different. And, if you don’t like it, you can always get a new mortgage!

Continue step 9, 10, and 11 during step 12. Continue step 12 until the mortgage is eliminated.

What’s Next

After many years and lots of work, you can complete step 10, 11, and 12.

Of course, you will never finish step 9 because even in retirement you should not spend all of your income!

If your mortgage is paid off before you retire, you may want to go back and increase your retirement contributions to the maximum legal amount. You’re financially independent now, so you might as well keep the government’s hands off as much of your money as possible.

Other than that, what should you do? Congratulations, you now have 100% financial freedom. You can do whatever you want. There are only three things you can do with income: spend it, save it, and give it. So, make a plan that works for you to do some of each of those things. Just because you have finished step 12, doesn’t change the rules. You should continue to do some of all three.

Enjoy some.

Save some.

Give some.

Final Thoughts

2020 has reminded us that sometimes, the wolf comes to the door.

If you have decided that you are done living in a house made of straw, then it is time to make some changes. The next time the wolf comes to your house, he’s going to leave hungry.

Start by building a foundation. Learn where your money comes from and where it goes. Put all income from all sources into savings, and only take out what you need. Set aside a 1-month emergency fund, and destroy your high-interest debt.

Then, you can develop a new routine. Make sure that your family will be taken care of if you die. Start taking advantage of an employer match, if it is available. Boost your emergency fund to 6 months. Then, eliminate all non-mortgage debt.

When you are out of consumer debt, it is time to build a legacy. Boost up your retirement contributions to 15% of your income. Start putting money aside for your kids’ college. Make a plan for you how you will deal with Long-Term Care. And then, pay off your mortgage.

You can do it. I believe in you.

If you need help, reach out! I’m happy to help any time. Check out my Personal Money Coaching Services for more details.

What to Read Next

For more information, check out these articles that offer more detail about these topics. Enjoy!

I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.

4 thoughts on “The 12 Steps to Eliminate Debt and Build Wealth

  1. EVERY WEEK you give excellent advice! I am sure it is a huge help to the people that read and heed.

    1. I’ve definitely seen a huge range! Sometimes there is no room for progress after step 2 in the beginning. But, by creating an Undetailed Budget, we can identify what’s causing the shortfall. If it’s too little income, we identify alternate sources of income. If it’s Recurring Expenses, we start removing subscriptions. Or, if it is primarily Personal Spending, then we have to dive deeper into where the money goes. I have never met anyone yet who couldn’t find some way to take control and improve their financial situation.

Join the conversation

This site uses Akismet to reduce spam. Learn how your comment data is processed.