The first three steps on how to build a financial foundation are:
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- Create a basic emergency fund
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- Be a debt free
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- Build a 3 to 6 month emergency fund
For a basic emergency fund, we recommend saving enough cash to cover about a month’s worth of expenses, which gives you a cushion as you move on to step two: getting yourself out of debt.
When you’re deep in debt, you’ve deferred maintenance on investment. Thats why it is important that, once you have a savings cushion, treat your debt as priority, especially if it’s high-interest debt, such as the balance on a credit card.
The mathematical wisdom in paying off debt is via the so-called avalanche method — focusing on the highest-rate debt first — instead of favor the psychological wins afforded by paying off debts in order of the smallest balances, a strategy known as the snowball method.
After getting out of the debt and achieving emergency fund, investing is the next step. Under a traditional model, you might stash away 20 percent of your income,
While you may want to invest for the long-term, you can divert some of the money to improve your life in the near future. If your goal is to open a business, maybe you want to invest in that business, where the better answer financially might be to invest in the stock market. Or maybe it’s investing in going back to school, changing careers or taking a sabbatical.