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If you've never had a chance to develop a financial plan for your life, there's no better time than now. Laying the groundwork for a solid financial foundation is a great first step toward your aspirational goals. But figuring out how to prioritize the many financial areas of your life that need attention can be overwhelming, which risks derailing your financial plan before it starts.
Some financial priorities may be more exciting than others, of course, but it's important to take the right steps—especially early on. Here are seven financial moves you can make to get your finances in order and start working toward financial security and independence.
1. Start Building Your Emergency Fund
An emergency fund may feel like the least beneficial step in the process. After all, the money doesn't work for you unless you actually experience an emergency. But having enough cash reserves set aside for a rainy day can be a lifesaver. It can help you avoid going into debt if an emergency arises, and keep your other financial goals on track.
Common reasons you may need to use your emergency funds include job loss, a short-term disability, or a needed repair to your home or vehicle. You get to determine what constitutes an emergency financial need in your life, but a tropical vacation or new pair of shoes probably shouldn't qualify.
Many financial experts recommend socking away up to three to six months' worth of basic expenses in your emergency fund. Saving that much might be a tough prospect, but it's a good idea to get at least a small safety net in place before you start working on other financial goals. The right figure can vary from person to person, but consider working to set aside $1,000 or more before continuing on your financial journey—and then contributing to it regularly until you reach your ultimate goal.
2. Get Your 401(k) Plan Match
It may seem a little early in the process to discuss retirement. For many people, that stage of their lives is still decades away. But if your employer offers a 401(k) plan with a contribution match, there's a big reason you should at least contribute enough to maximize that benefit.
A 401(k) match could give you up to a 100% return on your investment. For example, let's say you earn $60,000 per year and your employer matches your contributions up to 3% of your salary. If you contribute $1,800 per year—that's $150 per month—you'd get another $1,800 from your employer. You'll be hard-pressed to find anything else that can beat that immediate return.
That said, there are some exceptions to this approach. In some cases, an employer may have a vesting schedule for their contributions. For example, you may need to remain with the company for a set period of time before you own their contributions. If you leave before that time, the employer keeps the money.
In this case, if you're not confident you'll stay long enough to get the full amount, it may not be worth it to prioritize this quite yet.
3. Purchase Insurance
Insurance is another aspect of a financial plan that's nowhere near as exciting as investing and eliminating debt. In fact, you generally pay for insurance hoping you'll never actually need to use it.
But just like with your emergency fund, having the right insurance coverage can save you and your loved ones a lot of money and heartache if you end up needing to file a claim. Some of the more important types of insurance you'll want to research include:
Unlike some forms of insurance, it's fairly inevitable that you'll end up using your health insurance policy. You can get health insurance through your employer or the federal government's health care marketplace.
Employer-sponsored plans are usually much cheaper and often provide better coverage than other options. If you can't get health insurance through an employer, though, and you're struggling financially, you may qualify for subsidies on a marketplace plan.
There are a lot of reasons to talk yourself out of buying life insurance. After all, you won't be here to see what good a life insurance policy does when it pays out. But if you have a partner and children, it can help alleviate some of the pain and stress related to your passing. It can also help them pay off debts, replace your income for a period and more.
Even if you're single with no dependents, providing your loved ones with the funds they need to pay basic funeral- and burial-related costs can save them from having to resort to debt or GoFundMe to cover the expenses.
In some cases, you can get an inexpensive (or free) life insurance policy through your employer, but you may be limited on the amount of coverage. Also, if you lose your job, you can't take the coverage with you. In many cases, it may be worth it to purchase a personal policy, even if you're getting some protection through your employer.
Losing your ability to work due to a disability can be devastating. Not only have you lost your income, but your expenses may be overwhelming for your loved ones. Disability insurance is designed to replace some of your lost income on a short- or long-term basis.
If you have a robust emergency fund, you may not need to worry about short-term disability coverage. But long-term disability insurance typically doesn't kick in until three months or more after the event that caused a disability. So it's important to have either short-term coverage or a rainy-day fund that's big enough for you to get by in the meantime.
If you own a car, it's crucial that you have enough auto insurance coverage to protect your finances in case you get in an accident or something else happens to your vehicle. It may be tempting to only get what's required by law, which is usually a low amount of liability coverage.
But consider how an accident could cripple you financially, and get enough coverage to make you feel comfortable in the worst-case scenario.
Homeowners or Renters Insurance
If you have a mortgage loan, you're likely required to have homeowners insurance, which protects your home and its contents from various perils. Also, in many cases, landlords require their tenants to have renters insurance, which protects your personal belongings.
In either case, though, if you're not required to have it, it's still a good idea to buy some coverage.
4. Pay Off High-Interest Debt
At this point, you may be wondering if you can start investing in the stock market. Something to consider, though, is that while stock returns can be volatile, you'll get a guaranteed return in the form of interest savings if you can manage to pay off your high-interest debts early.
To decide whether it's worth it to invest or pay off debt, take a look at the interest rates on your loans and credit cards. Financial advisors often use 7% as a benchmark return for long-term investing in the market. So if you have a debt that charges a higher interest rate than that, you may be better off tackling the debt before you get into the market. In addition, paying down high-interest debt like credit cards can improve your credit score and make borrowing money for a house or car less expensive when that time comes.
5. Save 15% Toward Retirement
Financial experts recommend that you put at least 15% of your gross monthly income toward retirement. So if you earn a $60,000 salary, that's $9,000 each year.
That can seem daunting, especially if you're not saving anywhere close to it. One way to make it more feasible is to set up your retirement plan so you increase your contributions at least slightly once a year, so it's not too much of a shock.
The good news is that if you're getting a 401(k) contribution match from your employer, that money counts toward your 15% goal. So if you contribute 3% of your salary and your employer gives you another 3%, your savings rate is 6%. And, if you're saving in a 401(k) or traditional IRA, your contributions are made pretax, which reduces your income and thus the taxes you pay on that income.
Again, retirement may not seem like a priority for some because it's so far off. But the more you invest early in your adult life, the less you'll have to catch up later.
6. Max Out Your Emergency Fund
At this point, you've already built a solid foundation. But if your emergency fund isn't where you want it, take time now to start working on getting it there. Remember, experts recommend three to six months' worth of expenses. But rules of thumb aren't meant to be absolute.
Take your time to consider how much money you'd be comfortable leaving in a savings account for a rainy day. For some people, it may be at the low end of the suggested range, while for others—especially those with children, insecure jobs or a mortgage—it may be more.
7. Save or Invest in Other Goals
You may have a lot of other financial goals beyond the steps we've already discussed. Once you've built your foundation, now is the best time to start working toward achieving them. That can include saving for a down payment on a home, home renovations, a family vacation or anything else that's important to you.
It could also mean just investing without any particular goal in mind beyond earning some gains. Take some time to consider which goals are most important to you and prioritize them based on what you can afford, your level of risk tolerance and your other financial obligations.
Having a Budget Is Key
In all of this, one of your best tools for managing your money is a simple budget. Budgeting allows you to not only see how much money you earn each month but also where it's going.
By breaking down your spending into different categories, such as groceries, fuel and entertainment, you can pinpoint areas where you can cut back. You can then reallocate that cash flow toward your financial goals.
In all of this, keep in mind that bolstering your financial health isn't a linear process. In some cases, it may make sense to switch around the steps to accomplish the goals that are most important to you. In fact, most people may prefer working toward multiple goals at a time rather than just focusing on one.
The important thing is that you find a way to work with your budget so you can maximize the value you can get from your dollars.
Monitor Your Credit Score and Report
Your credit history is a key element of your financial health. If you have good or excellent credit, you'll have a better chance of getting inexpensive financing, which can free up more cash flow for more important things. In most states, it can also save you money on auto and homeowners insurance.
Check your credit score to see where you stand. If it's not where you want it to be, check your credit report and review areas that need some improvement. For example, get caught up on past-due payments, reduce your credit card balances and avoid unnecessary credit applications.
Building and maintaining good credit and working toward your financial goals are lifelong endeavors. The sooner you start planning, however, the easier it will be to get to where you want to go.