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Getting your black belt in money

Here’s a cheeky list I made to see what progress you’ve made (and what you might still need to do) in becoming a financial ninja.

🚼 White belt: tracking

You have made a commitment to educate yourself about money, get yourself out of debt, and get your financial life in order. You have thought about what “enough” means to you in terms of lifestyle and money. You have created a personal balance sheet and you know what your personal net worth is. You take a monthly net worth snapshot to track your net worth. If you haven’t done (or stopped) with any of these, you have lost your white belt.

🚸 Yellow belt: fixing your debt

If you have debt; this applies. If not, you got this belt as a free bonus.

You have created a specific debt sheet, where you list each liability, with the corresponding interest rate and the outstanding balance you still need to pay. You apply either the debt snowball or debt avalanche (or a hybrid) approach to pay it off, or you get professional help. You will need to take a monthly debt snapshot of your debt reduction until it reaches zero (all debt, except for student debt and your mortgage). You have adjusted your thinking, spending, and living to fix your debt faster.

🦺 Orange belt: emergency funds

You started an emergency fund, (ideally an inflation-beating cash account like a savings account, money market account, or short-term bond account) funded with at least enough to help you through an emergency.

You have enough money in your checking or current account to cover each month’s regular expenses.

You stop using a credit card if you have debt or if you are unable to pay it off completely at the end of the month. You also know what your credit score is, and track it every month.

You know some basic financial terms, like inflation, interest, savings, investing, and speculation. You understand and can explain what a balance sheet is, and what assets and liabilities are.

🌳 Green belt: consistent progress

You have consistently reduced your debt and increased your net worth, as shown in your monthly snapshots over at least six months.

You have also contributed an amount equal to three months of living expenses – including rent/mortgage; all liability payments like insurance and taxes; food; and transport – into your fully-funded emergency fund.

You know what an income statement, income, and expenses are.

👩‍💼 Blue belt: later in life

You opened a pension account, retirement account, or other accounts with tax advantages. You contribute 10-30% of your income to these accounts. If there is more than one of these “later in life” investment accounts with tax advantages, you take advantage of them all. If you have any government or employer matching your contributions (or otherwise giving you free money), you invest the full amount to get the maximum extra amount.

💵 Purple belt: investing for yourself

You have a personal investment account to invest in the stock market with a financial provider that doesn’t charge monthly fees and has low/no trading (buying or selling) fees or the cheapest robo-advisor you can find. You’ve built up a portfolio buying the lowest-cost broad market index funds / ETFs with a plan to keep them somewhere between five years and “forever”. You set it and forget it. If there are tax advantages to certain investment accounts, you take advantage of them.

As your investment account grows and as you get older, you start rebalancing your portfolio with part of it in safer cash or cash-like instruments that protect you not only against inflation but also against volatility, like inflation-beating savings accounts, money market accounts or low-risk bonds.

If your investment account is large enough, and you have the right risk appetite, you might be using 1-5% of your investment account balance to speculate in individual stocks, companies, peer-to-peer investment or lending, commodities, or forex.

You have read a lot about how to invest in a responsible way and understand terms like liquidity, earnings-per-share, company valuation, debt-to-income ratios, interpreting financial statements, and the like. If not (or if this doesn’t interest you) just keep it in low-cost index funds for the long term, you’ll keep your belt that way.

☺️ Brown belt: investing for others

If you have any dependents, you set up an early adulthood fund for them. This is to help them pay for college or otherwise help them early in their career so that they don’t ever have to incur debt. Take advantage of all tax incentives to contribute to these accounts.

Whether you have children or not, you have a plan on how you’re going to give away a part (or all of) your money at the end of your life —tomorrow or many years from now— in a responsible way.

🕊 Red belt: giving away & being debt free

You give away a percentage or a fixed amount of your money each month or each year; a place where it has the highest impact on the lives of others. You take advantage of all tax benefits for these donations, where available.

You have paid off all debt including short-term debt like credit cards, personal, and car loans, but also long-term debt which you paid off early, like student debt and maybe even your mortgage.

🥷 Black belt: financial independence & retirement

Whether you’re still earning an income or not, you have reached the point where you no longer need to work for money: financial independence.

You keep growing your wealth in a responsible and cost-effective way.

You never withdraw more than 4% of your portfolio to cover your expenses.

Your money keeps growing at a rate higher than what you’re spending, and you never run out of money.

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