So, you finally put your head down and got your debt paid off – congratulations! This is HUGE. While you should want to celebrate this achievement, it is SO important that you take the right next steps to ensure you never get into that situation again. It is essential that you set yourself up with some security and start to get your money earning for you. There is a lot of advice out there on what to do first, and I am certinaly not saying there is one right way to go about this. However, I will share what has worked best for me.
1. Building up Your Emergency Fund
Just when things start to fall into place, life has a way of testing you. It just loooooves to throw a wrench in plans, and sometimes when it rains…well, it pours. Maybe your car breaks down and needs new breaks, or perhaps you need dental work that your insurance won’t cover, or maybe you get laid off. You just never know. These things come out of nowhere and can be incredibly stressful, especially if you aren’t prepared. This is why it is VITAL that you have an emergency fund. You want to avoid throwing these things on a credit card just when you’ve reached a zero balance. It is critical to get on top of this as soon as possible. This is why I recommend prioritizing this when you get out of debt. Here’s how to start:
- Open a dedicated savings account: Keep your emergency fund separate from your regular checking account. I highly recommend opening a high-yield savings account so your money is actually earning interest instead of just sitting there. A personal favorite of mine is Capital One 360 Performance Savings, but I will provide a few other suggestions next week in an article specifically dedicated to high-yield savings accounts.
- Start small: While the ultimate goal for an emergency fund is to save up 3-6 months of living expenses, start by setting a goal of $1,000. I would bet that you were contributing a decent amount per month to your debt payoff until now, so my advice would be to throw that same amount (or even half of it if things were getting tight) into your emergency fund until you reach your goal. If you reach $1,000, try for $2,000, and keep at it until you hit 3-6 months of living expenses.
- Set up automatic payments: Set up your bank account to automatically transfer funds to your savings account, whether that be weekly or bi-weekly; automatic transfers ensure you don’t spend that money on something else. You won’t even know it’s gone.
2. Get Your Retirement Account started (or pick up where you left off)
I know that retirement seems pretty far off for some of you, but the sooner you get started, the better off you’ll be, thanks to the power of compound interest. Here are a few tips:
- Take advantage of your company’s 401k match: If your employer offers a 401k and does a match (3% is pretty standard), make sure you contribute the minimum amount needed to get the maximum match your employer offers. This is FREE money!! Do not pass this up. If your company is generous and offers a higher percentage match than you can afford to contribute, do what you can, and don’t stress! Anything you’re able to contribute today is going to make a big difference down the road.
- Open a ROTH IRA: There are many different opinions regarding ROTH vs. traditional IRAs, but I think having some money in a ROTH IRA is a good idea. If you don’t know much about IRAs, I’ll give you a quick rundown that hopefully gets the basics across.
- A traditional IRA is pre-tax, so it benefits you NOW by lowering your taxable income. However, it means you will have to pay taxes on any withdrawals from this account during your retirement.
- A ROTH IRA is after-tax: it makes your current taxable income a bit higher, meaning that your current earnings will be slightly lower than if you were contributing to a traditional IRA. BUT it means that when you retire and withdraw money from this account, you don’t have to pay any taxes on it.
- I don’t know about you, but I have no clue what my situation will be in the future. I want to have some peace of mind in knowing that at least one of the accounts that I’ve secured for my retirement will be 100% mine when I need it. Do your research, but I would bet you will agree that having a ROTH within your portfolio is the way to go. I currently have a ROTH IRA that I aim to max out each year (more on the maximum contribution limits in an upcoming article) and a 401k through my employer, contributing just 3% of each paycheck to get their 3% maximum match.
3. Start Investing
After you’ve got a solid emergency fund and you’ve started contributing to your retirement…the next step is to start getting into the world of investing. I was never taught about investing growing up. Many of us weren’t. For me, it was some far-off thing my Dad talked about and something I’d hear about on the morning news. As I entered adulthood, I never had any extra money to invest, and it seemed so risky that I figured it would never be something I would have the opportunity to participate in. That is the reason so many of us don’t invest at all; We are too afraid of what we will lose. Well, it’s about time we step out of our comfort zones and think of it in terms of how much we could gain instead. There is no point in having a pile of money sitting in a box when it could be working for you. Now is the time to get started.
- Educate yourself: Start by discussing things with friends and family, reading articles, and listening to podcasts. Educating yourself is the easiest way to shake off some of that fear and begin to feel empowered in the investing world. My favorite podcast is the Rich Habits Podcast. I listen to it on Spotify and love how easy it is to follow and how much information they provide.
- Start simple: There are multiple accessible platforms to start your investment journey. My favorite is Public, which I have learned even more about since listening to the Rich Habits Podcast. There are also platforms such as Acorns and Robinhood, both excellent introductions to investing. While there are robo-advisors out there that can help with this journey… they cost money. Until you have hundreds of thousands to invest, I would steer clear of paying fees. Put the time in to do your research, keep it simple, and get your toes wet before paying someone else to do it for you. If you feel completely lost, reach out to friends and family who have the knowledge before going the route of hiring someone.
- Think long-term: Investing is about something other than getting rich quickly. It is about dollar cost averaging, compounding interest, and the time you spend in the market. Don’t check your account balance every day; you will go crazy. Feel proud of yourself for taking action and building your wealth. You are so far ahead of so many others out there.
Well, you’ve got some work to do! I’ll leave you to it. In the upcoming weeks, I will share some recommendations for high-yield savings accounts, investing apps, and a bit more on retirement planning. Stay tuned, and thanks for being here!
her money. her methods. 