Dave Says – 

Dear Dave,

My wife and I are in our mid-thirties, and the only debt we have is a combined $15,000 in student loans and credit card payments. We’ve got almost $100,000 in our 401(k) plans, plus we have no children. What steps can we take toward becoming even better investors?

Curt

Dear Curt,

Whether you’re building a house or building wealth, a rock-solid foundation is an absolute must. Without a firm foundation, everything can easily fall apart. So, while you two aren’t off to a bad start investing-wise, let’s talk about the “construction” process a little.

The first brick you want to lay in your financial foundation is becoming debt-free. The second is to have an emergency fund of three to six months of expenses in the bank. This is money that you never touch, except in the case of an actual emergency. It doesn’t go toward vacations, Christmas or anything else.

These two elements help form a firm foundation from which you can build wealth. Most people skip these steps, and jump right into funding 401(k)s, Roth IRAs and mutual funds. These are all great things, but the problem in doing it that way is you’ve started work on the house before you’ve laid the foundation. Believe me, this can cause all kinds of setbacks down the road.

Basically, we’re talking about the first three Baby Steps in my plan. Baby Step 1 is to get your emergency fund started with $1,000 in the bank. Baby Step 2 is paying off all your debt, except for your home, using the debt snowball system. And Baby Step 3 is to finish building your emergency fund to the point where you have three to six months of expenses sitting there.

Curt, the debt you two have isn’t a huge problem. But it is the symptom of you both buying a bunch of stuff you couldn’t afford with money you didn’t really have. Get on a written, monthly budget together, where you both agree on where every dollar is going before the month begins. I want you and your wife to break the debt cycle by having a permanent game plan.

Once you do that, you’ll have freed up your largest investing and wealth-building tool—your income!

— Dave