If there’s one thing we aren’t afraid to play on repeat for you, it’s that the best time to invest is yesterday. That’s because the longer you wait to get started, the more opportunity for future returns you could be giving up.
It’s true. But it’s not the right advice for you if you don’t have the wiggle room to invest just yet.
We’ve been there, and there are some other steps you can work on first — every money move you make today is something Future You will thank you for. Here’s where we recommend to start, more or less in this order, to build up a financial foundation (and get ready to start investing down the line).
1. Track your money and make a plan
Nope. You don’t need to track every single penny you spend on a spreadsheet. All you really need is a high-level plan so that you know what’s coming in, what’s going out, and whether you’re working toward your goals. At Ellevest, our favorite is the 50/30/20 rule. It’s straightforward and flexible. Here’s how it works and how you can adjust it to fit your real life.
There’s no magic answer for how to find more money in your “budget” for saving and investing. But here’s our advice: Start where you are and, if you can, “pay yourself first” — set things up so your deposits come out of your paycheck automatically and you never get a chance to miss the money. And then bump it up a little bit at a time. Even if it’s 1% of your take-home pay — every dollar counts.
2. Get that employer 401(k) match
If you’re lucky enough to work at a company that provides a 401(k) match, and if you can swing it, our recommendation is to get. every. penny. they. will. give. you.
A 401(k) employer match is a big deal. Bottom line? That’s free money, people. And also: Yes, this counts as investing! So hey, maybe you don’t have to wait that long to get started after all.
3. Start your emergency fund
From cell phones dropped in the toilet (been there) to medical emergencies to lost jobs, financial emergencies happen — actually, these days it feels like they happen more than usual. And they’re the worst. But if you’re financially prepared for them — that’s when your emergency fund takes the stage like Britney Spears in the late ’90s.
We typically recommend saving up three to six months’ worth of your take-home pay in its own bank account that’s backed by the FDIC. that might feel like a boatload of money right now. And you probably have some other pressing expenses to deal with (like debt). So we recommend starting with a goal of one month's pay to give you a little cash cushion in the meantime — call it a mini-emergency fund.
4. Pay off high-interest debt
There are a lot of different kinds of debt. There’s credit card debt, which usually has really high interest rates and can make you feel like there’s a hole in your pocket. (Not too far from the truth.) Some other debt — certain federal student loans, for instance — might have pretty low interest rates, like less than 5%.
That high-interest stuff? You want to pay that off as soon as you can swing it. If you’re just paying the minimums, it’s kind of like digging with a shovel but dropping 90% of the dirt you pick up right back into the hole. (Here are two better approaches to paying off debt.)
But once you’re left with debt with lower interest rates, the math might work out so that you can switch your focus away from debt and move on to the next money move on the list. Here’s our advice on how to make that call.
5. Finish your emergency fund
Once you’ve tackled your high-interest debt, it’s time to come back and finish off that emergency fund. If you’re not sure how much you should squirrel away, here’s some more advice on where in the three-to-six-month range you likely fall. Trust your budget and take it one deposit at a time.
So those are the first five steps to building Future You’s grand financial plan: track your spending, get your 401(k) match, start saving for emergencies, pay off high-interest debt, and finish your rainy day fund. Step six? World domination. Obviously. (Oh, and investing. But maybe that’s 6a.)
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The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.