Financial wellness is a lifelong endeavor, not an end destination. And it’s never too late — or too early — to start practicing it. But deciding you want to take control of your money is the easy part. The tricky part can be figuring out how and where to get started.
Good news on that front: While everyone’s journey with financial wellness will look different, there are some key first steps to take no matter what. Together, they form your financial foundation, one of the three main components of a robust financial wellness practice.
What is a financial foundation?
Your financial foundation is the essential set of habits and practices that create the lasting financial security and stability you need to design, build, and live the life you want.
Money is not just money. Money is power. A strong financial foundation is what lets you stop living paycheck to paycheck, pay off debt, and start building wealth. It’s what gives you the power to leave a bad job, a bad roommate, a bad relationship. It gives you strength in the knowledge that when you stumble, you'll have the resources to get back up. It turns money into a source of strength, instead of stress.
If that sounds like ~a lot~ to work toward, don’t sweat. The financial foundation can be broken down into smaller building blocks, which we sometimes call the “financial basics” — the core steps we recommend everyone follow, in roughly the same order.
How to build a strong financial foundation: 8 steps to help you achieve financial security
1. Get to know your current spending habits
First things first: knowing where you’re at now. Log in to your bank account and credit card statements and look through your past few months of purchases. Then categorize them into three buckets: needs, fun, and “Future You” (aka saving, investing, and debt payments beyond your minimums).
Next, take a look at your recent pay stubs and add voluntary withholdings to your list. Any 401(k) contributions you’re making go in the “Future You” bucket, and insurance premiums get bucketed as needs. Other withholdings are up to you — a public transit benefit might go in needs, and a gym membership might go in either needs or fun (depending on whether you see it as a “must have” or a “nice to have”).
Finally, add everything up. (Here’s a downloadable Current Monthly Spending Tracker worksheet to help.) How much are you spending on each bucket per month? No wrong answers — this exercise isn’t meant to make you feel guilty; it’s just to see where you’re starting from today.
2. Adjust as needed (where possible)
Next, compare how much you’re spending to how much you’re earning. This is a key step for two reasons:
First, because if you’re spending more than you earn, you can start looking for ways to fix that. It might mean cutting back to just the essentials for a while, or maybe it’s only a matter of making some trade-offs to practice intentional spending. Or it could mean it’s time to supplement your income, either with a side gig or a new job altogether.
Second, because once you’re spending less than you earn, you’ll have a better idea of exactly how much wiggle room is left over at the end of the month. That’s the money you’ll put toward the rest of these building-block steps.
Btw, by now, you’ve pretty much done all the work that goes into creating a written budget. (High-five yourself!) Following a budget is a great way to ensure your money is doing what you want it to each month. We’ve got two favorite methods: the 50/30/20 rule, which follows the same three-bucket approach you just outlined, and the one-number approach, which, as the name suggest, is an even more simplified budget strategy.
3. Take advantage of your employer’s 401(k) match
If your employer offers a 401(k) employer match but you aren’t taking full advantage of it, now’s the time to sign up and start contributing enough to get the full match. Why? That’s free money you’re missing out on.
The most commonly offered 401(k) match is 50% up to 6%. That means, if you contribute 6% of your income to your 401(k), your employer will match half of it (3%). It’s like getting an instant 50% return on your money — which is just too good to pass up.
4. Save up to one month’s worth of take-home pay.
Financial emergencies have always been a fact of life. Cars need repairs. People (and pets) get sick. Phones and computers break. Which is why building an emergency fund is a big part of getting your financial foundation in a stable place.
In the past, conventional wisdom (including our own!) has been to tackle expensive high-interest debt before starting an emergency fund. The thinking was, if you had an emergency in the meantime, you could just use your credit card to cover it. But research has shown that having a cash buffer is more likely to help someone recover from “financial hardship” than access to credit.
That said, getting rid of high-interest debt is still really important. So we split the difference: Start with a mini-emergency fund by saving up one month’s take-home pay as soon as you can. Then …
5. Clear away high-interest (>10%) debt
Being in any kind of debt — credit cards, student loans, personal loans, etc — isn't great for a lot of reasons, including women’s overall health. But paying it off? Now that feels good. To get there, you have to pay more than the minimum required payments. This strategy actually saves you money, because the longer you take to pay debt off, the more interest you’ll owe thanks to compounding.
This is particularly true of debts with an interest rate of 10% or greater, like credit cards. They’re sabotaging your best budgeting efforts, siphoning precious dollars that you could be spending on your actual goals. There are two popular debt payoff strategies, both of which involve paying more than your minimums (and, strangely, named after snow). But getting these ~spicier~ debts off the board ASAP is the move.
Freeze! Hey, you’re doing great so far. Up until this point, all the steps to a strong financial foundation have come in an exact recommended order. From here on out, things are a little less black and white. The rest of these steps are listed in the order we loosely recommend; but if you’re riding high and would prefer to tackle them concurrently, that works too! It’s up to you — the resources you have, and what feels comfy.
6. Finish your emergency fund
Next up: rounding out that rainy day fund! We typically recommend aiming for three to six months’ worth of your take-home pay. How much you specifically should save depends on your situation, so now’s the time to look into that. Don’t feel like doing the math? Ellevest clients can access our emergency fund calculator.
Half a year’s salary sounds like a lot — and it is! But this is a marathon, not a sprint. Build it up gradually, at your own pace. The key is to just keep going.
7. Attack medium-interest (5–10%) debt
Once you’ve vanquished the nastiest debt, it’s time to take that same strategy and apply it to the only moderately rude debt — aka any debt with interest rates between 5% and 10%. Those aren’t hurting your bottom line quite as much, but it’s still worth knocking them out sooner rather than later.
For any balances with interest rates less than 5%, we usually recommend continuing to pay the minimums and using the extra money to invest instead. That’s because historically over the long term, you'd have earned more than 5% by investing.
8. Start investing toward your goals
If you’ve reached this point, please take a second and celebrate your hard work so far. Then keep the momentum going by starting to prioritize and invest toward your long-term money goals.
First up should be making a retirement game plan, if you aren’t yet — upping your 401(k) contributions, and / or opening an IRA. Ellevest clients can check out our 7 Days to a Real Retirement Plan email course for help getting started. Then you can focus on things like putting a down payment on a house, taking that mega-milestone birthday trip, starting your own business, and more investing goals.
Start building your financial foundation now
No matter how much you know about money (or how much you have), you don’t have to wait until some distant later date to feel confident about your finances. And think of it this way: the sooner you take your first steps to a strong financial foundation, the more time you have to work toward your goals.
Building a financial foundation takes practice and consistency, but you won’t be alone! We’re here to guide and cheer you on.
Your financial foundation is only one component of your overall financial wellness. Read about the others in our Guide to Practicing Financial Wellness, and download our free Financial Wellness Check-In Bundle of worksheets.
Want some 1:1 help to set up your financial foundation? Connect with our all-women team of CERTIFIED FINANCIAL PLANNER™ professionals for personalized financial guidance. Ellevest clients also get all the info (and tools!) you need to build your foundation with our 4-Week Money Reset email course. Become a client today.
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