One of the questions I get asked all the time by people my age is “how do I start? How do I manage my income?” While at first the answer may sound simple (get a job, pay your bills, don’t smoke crack cocaine), the process is actually fairly complicated. Depending on your particular set of circumstances, your path to financial success, or at least financial stability, can go in any number of directions. But what about the very basic steps?
Of these, there are at least six. They don’t involve any kind of mind tricks at all. In fact, these steps are really just a number of things you should set aside money for. I found this really neat graphic, I believe made by /u/brainsturgeon of Reddit, that best illustrates the steps:
Let’s go over them in more detail shall we?
The steps are:
Create an emergency fund
- An emergency fund is an absolute must, and before you start thinking to yourself of all the reasons why you don’t need one, I’ve heard them all before. You need one, at least a tiny one.
- A small emergency fund is enough money for you to survive on the bare basics (shelter, food, etc) for at least one month. This is acceptable if you are unemployed, flat broke, or otherwise in some kind of financial emergency. A decent emergency fund would be enough to last 3-6 months, while the suggested amount is 9 months of living expenses.
Contribute to your 401k up to company match
- It’s free money. No other investment, outside of gambling, will get you as good a return as your company match on a 401k. That said, when you’re just starting out, contribute only up to your company match until your other options are exhausted.
- If you have credit card debt or other high interest loans, pay those off first.
- Even student loans range from 6% to 9%, that will outperform most other investments you find in today’s market. Pay them off.
Contribute to IRAs
- Now we’re getting to the real meat of the matter, saving for retirement, and hopefully, financial independence.
Contribute to 401k beyond just company match
- Once you paid down your debt and looked at your other retirement options, feel free to max out your 401k contribution
Contribute to other savings and investments
- Index funds, bonds, playing the stock game, heck you can even get a CD if you really want to
- Investigate what investing options suit you best
- *cough**cough**index funds**cough**cough*