If you are committed to improving your financial picture, that is great! You are already off to a very good start by making the decision to better your financial outlook. However, you may be wondering what the roadmap towards financial security looks like. Here are the five main steps that you should follow to build your wealth.
1) Understand your finances. The first thing you need to do is take a snapshot of what your finances look like right now. That means knowing how much you have, how much you owe and what your income and expenses look like each month. Without knowing all of this, it’s impossible to improve upon it. Once you know what your expenses look like, you can start finding ways to cut back in order to have your money work harder for you.
2) Establish an emergency fund. While in the past when you needed money, you may have accessed funds by using a credit card, borrowing from a friend or family member or using a personal loan from a lender like Avant Credit, going forward it’s wise to establish an emergency fund for unexpected expenses. By establishing a small savings stash that is designed to be accessed only when absolutely necessary, you can avoid incurring debt and having your financial progress upended in the event that your car breaks down or a medical bill comes up.
3) Pay off debt. Once you have an emergency fund in place that will protect you in the event of unexpected expenses, you should focus on paying off your high-interest debts like your credit card bills, car loan and any other debts. Paying even a little bit extra towards your debts each month can go a long way towards eliminating them sooner.
4) Save. Once your debts are gone (or once most of them are gone, depending on how you personally feel about debt), you can start saving beyond your emergency fund. Building up your cash savings will help you in the event of bigger emergencies or help you avoid debt for bigger future purchases like a car or a down payment on a home. You should also be contributing money to your retirement accounts up to a certain amount if your employer offers you a match on those contributions because that’s basically free money!
Note: Paying down debt vs. saving often causes debate in financial circles. Some people like to save a bit more than a small emergency fund before attacking debt and others try to balance saving with paying down debt. It’s a personal choice that you can make for yourself and it may even change over time depending on life’s circumstances.
5) Invest. Once you feel that you have a good amount of cash saved up for future purchases and your debt is largely under control, you can start to think about making your money work harder for you outside of cash sitting in a low-interest savings or checking account. Head to your local library to check out some books about investing and start contributing more to your retirement accounts.
Now that you have a roadmap to building your wealth, go ahead and head back to Step 1 and start finding some extra cash to put towards your goals – you’ll be on the road to better finances in no time!