Personal finance is personal, but there are still certain steps that you should follow to create a strong financial foundation. The foundation of your finances is what determines your success in the future.
There are so many different steps and tips to follow when it comes to money. There is advice that states “these are the things you MUST do or steps you MUST follow” to ensure your financial success. Also, there is advice that can contradict all of these tips that have been provided, causing a state of confusion and not having a clear idea of where to start in terms of your finances. Well, I will help you to clear up some of this confusion so that you can determine what is best for you. Remember personal financial planning is personal. You have to do what is best for you and your situation. Even if you are doing what is best for you, there are still some core steps that need to be followed:
- Paying off Debt
- Funding a Savings Account
- Having an Emergency Fund
- Investing in Retirement
- Letting your money grow, by Investing
All of these steps are a part of building a financial foundation. After you have a strong foundation established, managing the rest of your finances gets easier and so does life. Money may not buy you happiness but it sure does make life a lot easier. Being poor is expensive and I don’t want that for you. So let’s clean up the mess so we can grow financially savvy with grace.
Paying off Debt
This is of utmost importance. Why? Because debt is expensive. Even if you have a good interest rate, debt is taking away money that you could keep in your pocket to invest or save. To pay off debt, I prefer to use the Snowball or Avalanche method. The longer you hold on to debt the more it costs. Those of you with student loans know all about that. Now, in this case, I am referring to consumer debt, e.g., credit cards, car loans, and personal loans. There are, of course, other debts such as student loans and mortgages, but for some of us (me included) if we solely focused on paying these off before doing other things, we wouldn’t have money to save or invest- even into retirement. We have to focus on that a little later down the line once our foundation is established.
Based on my favorite finance guru, Suze Orman, you have to think of student loans as another mortgage and just treat it as such, especially those of you with debt in the 6 figures.
Funding a Savings Account
This is important because many people do not have savings accounts that are funded because they can’t manage to save. Not having a savings account is very expensive. This is usually when all your emergencies happen; when you don’t have any extra money. You will notice when you have savings, your financial ‘problems’ will lessen or not seem as much of a burden but more of an annoyance.
There are two types of savings accounts that you should focus on. The one attached to your checking account and a high yield savings account. The savings account attached to your checking account is for immediate access to your money to protect you from overdrafts and to have quick access to cash, if needed. A high yield savings account is more focused on long term saving. To earn the full value of the interest rate in a high yield savings account your money needs to sit in the account for at least a year. A high yield savings account is NOT an alternative to an investment account. That type of account is completely different.
Having an Emergency Fund
Es muy importante (it’s Spanish, learn!). An emergency fund is for exactly that, emergencies that are life altering events such as being out of work or emergency repairs to your home or car.
Investing in your Retirement
GET. YOUR. COMPANY. MATCH. I cannot stress this enough, seriously. You have to be there anyway, you might as well take advantage of all the perks they offer, you earned it anyway. This is free money, even if it doesn’t seem like a lot, TAKE IT. Once you’ve started investing in your retirement account, please log on to your account and invest your money manually (if that’s an option) or see where your money is being invested. If you don’t verify the money is being invested where you choose, it may be invested in the default investment fund or just sit in the account doing nothing. For most retirement accounts, if you do not like how your account is being managed you can roll it over to another retirement account somewhere else. Before you perform any rollovers, make sure to do your research to ensure you roll over your account in the allotted time period so you do not face any tax penalties.
Before you get all aggressive investing in your retirement, invest up to the amount that allows you to receive the company match. Then use your remaining funds to focus on paying off debt. If you have already done that, then you’re doing amazing, sweetie. I want you to work up to investing the IRS max in your account each year. For 2023 the max is $22,500 for traditional 401k. For ROTH accounts the max is $6500. For those of you over 55 (if you are reading this), it’s $7500 for ROTH and for 401k you are allowed a 7500 catch up in addition to the $22500. If you are able to invest the IRS max in your retirement account, we will talk about what to do next in another article.
Letting your money grow by Investing
TIME.IS.MONEY. Especially when it comes to investing. The younger you are, time is truly on your side to grow your riches. And by young, I mean 30 and under. For those of us in our early to mid 30s, time is ticking and each day that passes by becomes more vital. At this point one year can have a significant impact on our investments and larger financial contributions will be required to grow your investments.
For many, student loans hinder the growth of our finances. Even though the preference would be to pay off all debt, student loans included, then save, then invest, at this time it’s not feasible unless we want to eat cat food in retirement and work until we are 90. And I say we because I am in the same boat as you.
Now don’t go balls to the wall and fully fund your investment and retirement accounts. Before you get there, I strongly suggest focusing on paying off your student loans. Once those are paid off, then you will have way more money to max out your retirement and investment accounts to make up for the time you missed while paying off your student loans. Since we lost out on time, we will need to make it up with more money.
To manage saving, retirement, and investment while you pay off debt, I recommend establishing these accounts and then set up recurring payments. For your retirement it would be up to the max needed to get the company match, if the match is 100%— then lucky you. Invest enough that allows you to still focus on your other goals. For your investment account, you can invest small amounts, such as $20/mo to slowly grow your account. Once you have established those accounts, then use the remaining money to focus on paying off your debt, creating your savings, establishing an emergency fund, and paying off your student loans.
So to summarize, focus on paying off your consumer debt, start your savings account and emergency funds, invest in your retirement, then prepare for investing.
These steps will help you to create a strong financial foundation. Even if you follow these steps you can’t skip one of the most important steps of creating a budget.