How To LEVEL UP Financially in 2024 | Investing Explained for Beginners

Everyone begins at level zero, a literal child. Caretakers provide for you. If you’re at this stage, my advice is to stay as long as you can.

Just kidding. You have zero responsibility, but also zero power.

There are 6 critical stages of financial power, and each one has its own objectives that you must complete before leveling up. As you advance through each stage, you will enjoy increased control, security, and freedom.

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You’re about to find out where you fall on the financial spectrum from the Ice Age to the Space Age.

Let’s get into it.

Level 1. Ice Age

If you ask the financial caveman about their financial planning, you might get a response like “unga bunga”.

There is no plan. The caveman does provide for themself, but the trajectory is unknown. The caveman is in the dark or the cave.

If the caveman describes your financial power level, then you are doing the minimum. You pay your rent or mortgage. You pay your utilities. You make your car payments. You’re at least making minimum payments on your credit cards and other debt, but there is no plan for improvement.

You are being 100% reactionary, paying only what you must pay at the moment. The financial caveman has very little security since there is no plan to deal with future difficulties.

Leveling up at this point means progressing to the Stone Age.

Level 2. Stone Age

The caveman moves out of the cave and discovers how to make basic stone tools.

On your financial journey, the very first tool that you need to develop is a budget. Once you develop this tool, budgeting will allow you to accomplish so many financial objectives and life goals. Budgeting is the foundation of financial success, and that is why building a budget was the first objective in the Stone Age.

After building your budget, you can see where all of your money is going. You can begin to hit your savings objectives after you pay all your necessary expenses. Necessary expenses include shelter, transportation, food, and your minimum debt payments.

The first and foremost important savings objective is to create your initial emergency fund. Your initial emergency fund should contain 1 full month of expenses, which you can determine because you made a budget. That way, if you lose your job, for instance, you have some time to find a new one before you can’t make your basic payments. Basically, it’s giving you a buffer between financial ruin and just one disaster in your life.

The best option is to open a separate high-yield savings account for your emergency fund. That way you can be sure that you do not accidentally spend too much and deplete your emergency fund. All of your savings should be used to fund this account before moving on to the next step.

The final step that you must take before graduating from the Stone Age is to pay off all of your super high-interest debt. Any debt that has an interest rate of around 20% or more would fall into this category. Typically speaking, this will be your credit card debt.

After the initial emergency fund is made, all of your savings should be used to pay off this debt as quickly as possible. From now on, holding credit card debt or any super high-interest debt should be considered unacceptable. I cannot stress enough how important it is to pay off your credit card completely every month.

Let me give you an example.

So you’ve got your budget made, an initial emergency fund built, and credit card debt eliminated.

Level 3. Bronze Age

You’ve just leveled up to the Bronze Age. You are no longer a beginner, you are a novice. You’ve got some skills and experience, but there is still a long way to go.

In the Bronze Age, humans started making nicer, shinier tools. The first tool that you need to start utilizing at this stage is the 401K employer match if it’s available to you. On average, an employer will match around 6% of your salary. This is additional compensation that you should not be leaving on the table.

It also gets you to start investing for retirement. Your employer will automatically pull money from your paycheck and transfer it to your 401K, so you don’t even have to think about it.

On top of the match, traditional 401K contributions are also pre-taxed, so you will pay even less in taxes as well.

If you are unlucky and you do not have access to the 401K employer match, don’t put any money in your 401K at this stage. There are other more important objectives for you to hit.

After allocating money for the 401K employer match, if you have additional savings, the next step is to start paying off your high-interest debt. High-interest debt is anything with an interest rate higher than around 10% or more. Examples of high-interest debt include personal loans, payday loans, and private student loans.

The next step is to use all of your remaining savings to pay off these high-interest debts that you have. After you wipe out all of your super high and high-interest debt, you will have so much more money freed up to do other things.

Think about what you can do with an additional $250 every month.

The final objective of the Bronze Age is to create a full emergency fund. Once all of your high-interest debt is paid off and you continue to utilize the 401K employer match, you must grow your initial emergency fund to 3 to 6 months of living expenses.

The exact amount will depend on the type of job that you have. If your job is very stable, 3 months of living expenses should be fine. If your job is very volatile, though, having closer to 6 months of living expenses would be wise.

Once this is done, you’ve mastered the Bronze Age and it’s time to level up.

Level 4. Iron Age

Now that you have left the Bronze Age and entered the Iron Age, you enjoy the security of a full emergency fund and the freedom from having no high-interest or super high-interest debt.

If you have made it this far, then you are already further than most.

So you’re doing pretty well.

The first objective of the Iron Age is to take advantage of a new tool, an IRA for additional retirement savings. If you are one of the unlucky few who did not have access to the employer match for your 401K, investing in an IRA is where you’ll start your retirement investing.

There are two different types of IRAs: traditional and Roth. The right one for you will depend on your specific circumstances. You could even contribute some money to both.

If you need help deciding which one is best for your situation, check out Roth IRA versus Traditional IRA | Retirement Investing where I go into more detail.

The reason you should top off your IRA instead of contributing more to your 401K is that the IRA has lower fees and more options. The only reason you would prioritize your 401k over an IRA is for the employer match.

The second tool that you should utilize in the Iron Age is the HSA account. HSA stands for “health savings account”, and it is an amazing retirement savings account. Unfortunately, you only have access to an HSA if you have a high-deductible healthcare insurance plan.

If you would like to learn more about the HSA, check out How HSA DESTROYS Roth IRA and Traditional IRA in Retirement Investing. It is the ultimate retirement savings account.

The final objective of the Iron Age is to turn your attention to the last category of debt that is worth accelerating: moderate interest rate debt. Any debt you have left with an interest rate of more than 5% will fall into this category. This might include personal loans, car loans, or even your mortgage.

Putting extra money to accelerate your medium-interest-rate debt is worth it, especially at the upper threshold.

Each loan that you’re able to pay off completely frees up more of your income. This allows you to snowball other debt payments or increase your investment.

Paying off your low-interest-rate debt is not something that you need to accelerate, especially if the rate is less than 3%. Low-interest rate debt should be paid off as slowly as possible because of the opportunity cost. Your money would be much better served investing in the market or yourself, where the return is potentially much higher.

If you have managed to top off your full emergency fund, employer match 401k, IRA, HSA, and knocked out all of your high-interest debt, then congratulations. You have leveled up from the Iron Age to the Industrial Age.

Level 5. Industrial Age

Development that we humans achieved during the Industrial Age was making goods with machines instead of by hand. There was an explosion of productivity and growth.

Similarly, your goal is to achieve the same exponential growth with your savings. You want the profit from your investments to surpass your own contributions and eventually your whole income.

There are many ways to achieve this. You can continue down the same path from the previous ages.

1. After maxing out your IRA and HSA every year, you can then work towards maxing out your 401K.

2. After taking advantage of all the available tax advantage accounts, you can then open a personal brokerage account and continue adding to your investments.

There is nothing wrong with this strategy, but the amount of time that you spend in the Industrial Age will be proportional to your income.

For instance, if your income only allows you to save 10% for investing, you will likely be in the Industrial Age for a long time. On the other hand, if your income is so high that you can save 90% for investing, then your investments will grow incredibly fast compared to your expenses.

Because of this, the fastest way to master the Industrial Age is by investing in yourself, especially if you’re not somebody who has a super high-income job. This could be in the form of learning new skills for promotion, starting a business, or producing and selling a product.

The possibilities are endless. Whatever path you choose, your goal is to grow your investments until they reach a critical mass.

Once this is achieved, you have reached the Space Age.

Level 6. Space Age

Your investments have launched into space. As long as you continue to use that first tool that you developed back in the Stone Age, the budget, and your investments will grow faster than you can spend them.

The reason for this is compound interest. If you haven’t heard of the eighth wonder of the world, according to Warren Buffett, compounding interest will accelerate your gains faster and faster.

The classic example to illustrate this is the magic penny.

If you have a magic penny that doubles in value every day, after the first 15 days, you would have $327. Feels pretty overwhelming, not a huge growth over 15 days.

But after the next 15 days, you would have just over $10 million.

Investment returns will compound in a slower but similar manner. You will experience small returns at first until you hit that breaking point where the compounding gains literally blast off.

When this happens, you have achieved ultimate financial freedom.

So there you have it: 6 Levels of Financial Power. Personally, I am in the Industrial Age. What is your financial power level? Reply and let me know.

Here is an infographic that nicely sums up his whole article (just right-click to save). I have it set as my wallpaper as a reminder of my financial growth. Until next time!