Money Steps You Should Take Now
Create a budget, start your emergency fund, save enough for retirement, pay down debt, and start investing.
Read any publication online or offline, and you will find many articles predicting financial doom and gloom. Unfortunately, much of it is true. We are experiencing inflationary pricing at the pumps, stores, and elsewhere.
Higher prices for goods and services also translate to less money in your bank account and less to budget with each month. Fortunately, there are smart money moves you can and should make right now to protect your future, and it all begins with a budget.
Create a Budget
Creating a budget is easy, whether you’re a numbers person or not. Many great budgeting tools and apps are available today. The great thing is a budget only needs to be as complex as you want it to be. As long as it contains your monthly income, expenses, and a way to show how and where you’re spending your money, that’s what matters most.
Before creating a budget, it’s important to have a baseline. You need to know where your money is currently going before you can make reasonable, positive changes. One way to do that is with a budget analysis calculator.
Once you know where your money is going, it’s easier to decide where you have some wiggle room to cut back and where you don’t.
Start an Emergency Fund
A budget isn’t the only thing you need to manage your money. An emergency fund is essential, but not everyone has one.
Start small with a $1,000 emergency fund. This amount will only cover minor emergencies, but it’ll give you something to start with until you pay off debt. If you must dip into the $1,000 starter fund while paying off your debt, stop what you’re doing and rebuild your starter fund before resuming paying off debt. This strategy ensures you always have a small bumper in case you need it. Once you clear your debts, return to the emergency account and fully fund it.
A fully-funded emergency account should cover 3-6 months of your living expenses. If you live with a disability, are a single parent or sole provider for a family, or your income is unpredictable, then plan to increase your emergency fund to cover 9-12 months of living expenses. This increase gives you more of a bumper to fall back on should something come up.
However, a fully-funded emergency account takes time, and if you have debts to pay, it’s better to prioritize your approach by starting with the $1,000 emergency fund until you’ve paid off all debts.
Pay Down Debt
There are two main approaches to paying down debt: the debt avalanche and the debt snowball.
The debt avalanche focuses on paying off your highest interest debts first and lower interest debts later. While this might save you in interest payments, it can take longer to pay off larger, individual debts. If you’re motivated by small wins, the next approach might be a better choice.
Financial guru Dave Ramsey popularized the debt snowball. With the snowball method, you list all your debts based on monetary value from least to greatest. Then, you pay them off in that order and apply the previous debt payments to the next debt to shorten the payoff time as you go.
Once you’ve paid off your debt and fully funded your emergency account, it’s time to start building your wealth. You can do that with investments such as the following:
- Certificates of deposit
- Mutual Funds
- Exchange-traded funds
If you’ve never purchased an investment, then it’s best to start by speaking with a financial planner. Your financial planner can discuss your goals and needs and help you choose the investments that make the most sense for you.
Save Enough for Retirement
You’re never too young or old to start saving for retirement. However, the sooner you begin, the more time your investments will have to grow. Additionally, investing in retirement earlier may give you the advantage of compound earnings in which your money is earning more as it grows.
Several retirement accounts are available, such as 401k, Roth IRA, and traditional IRA. Each differs from the next. Like wealth-building, it’s best to speak to a professional about your long-term goals before deciding which type of retirement fund is best for you.
The Final Word
With economic uncertainty still looming, the sooner you start working on your money goals, the sooner you can secure a brighter future. Smart money habits are like other habits – they take time. But with consistency, they also pay off with the reward of greater financial freedom, which we all could use a bit more of.