Where Do I Even Start With My Investments??
Like most things in life, the most important part of anything is just getting started. Unfortunately and all too often though, STARTING is the scariest part of it!
But once you DO start your financial journey, you can then hit the ground running. It might take longer than you want it to, but that is like anything that is worth it in life. There is no immediate, fix-it-all pill we can take for our goals to be reached by tomorrow. But these steps can at least get it going as quickly as possible!
I know there can be an overwhelming amount of confusing and potentially conflicting information out there on personal finance and where to start. Here at Her Money Power, we recommend the same process that has worked for Sarah and others!
Even if you are someone with a lot of debt, if you’re someone who has not started investing yet, or if you do not have an HYSA for yourself, this is information that you can continue to rely on and check back on throughout your entire life to ensure your finances are in a good spot for yourself:
First, I need you to prioritize your emergency fund. An emergency fund is an amount of money that can cover your required spendings for at least 3-4 months. I need you to set this emergency fund up in an HYSA (High Yield Savings Account) so your money is working for you and earning you passive income through interest.
Historically, especially with our parents’ generation, the rule was to pay off your debt FIRST.
It’s nice that worked for them, but in today’s world though, I personally just don’t want people to feel like they need to take on MORE debt to pay for something like an emergency that comes up unexpectedly. Being pressed financially is stressful enough - trust me, I have been there and I know.
I used to stretch my $3.5k tax return back from the government each year to pay for my life while I was in school and only earning ~$15k each year. My tax return essentially became my emergency fund to cover my required spendings. I knew that I had my incoming rent payment covered. I knew that I could buy myself groceries.
Required spendings are what your MUST-SPEND purchases are each month. This at the very least typically includes your rent/ mortgage, bills (electric, water, internet, car payment, etc…), student loans, groceries, commuter transactions/ gas, and health insurance.
To help you with figuring out what your required spendings are each month, I’ve created a free Basic Budget Planner for you to have on hand!
After your budget is filled out and you know your required spendings, work to set aside any remaining income funds you have towards that emergency fund. Put aside what you can - even if it’s only $25.00 each month - to that HYSA.
As of right now in November of 2024, my personal recommendations for HYSA’s are through SoFi, Discover, and Capital One since all of these currently have an APY of 4.0% or more.
The best part about the emergency fund being goal #1 is that once you’ve built it, it’s there and you can leave it alone! That’s the point! It’s not meant to be invested, it’s meant to serve as “I need this $$$ in case my dog needs to go to the ER vet”, and you have it there for yourself. You can then start working on other financial goals, like below…
Secondly after your emergency fund is good and established, is working to pay off high interest debt. What is high interest debt? I personally see high interest debt as anything that carries a 7% or higher interest rate. This is CREDIT CARD DEBT, and maybe some student loans.
Why 7%? Because this is the interest that is expected from returns in the stock market. The average stock market return has historically been 7-8%. So if you have high interest debt, you are losing that amount of money by being in debt vs making money in the stock market.
To clarify, the stock market’s return is avg 7%. You lose more money vs gaining money by being in debt than the returns you’d get from the stock market. The best thing you can do for yourself is to pay off your debt FIRST, and then work toward investing.
If you have more than one source of debt with a higher amount of interest being whacked onto it, let’s say through a second credit card, you are going to pay that one off before the lower interest rate credit card. So if your second credit card is at 18% interest and your first credit card is at 14%, you are going to pay off the 18% credit card off first because that is going to lose you more money in the long run by not paying it off since more interest is being put onto it.
Once you pay off the high interest debt, WE WANT TO KEEP IT THAT WAY, especially with credit cards! We want to use credit cards at less than a 35% utilization rate (can speak about this in a future blog post) to get all of the benefits from the credit card, we do not want to get penalized by improperly using the credit card!!
So to recap before getting to the third item in your to-do list, your emergency fund is established and you have paid down your high interest debt.
The third thing we want to focus on investing for retirement in tandem with paying down low-interest debt. I would call low-interest debt as anything like (most) student loans, a mortgage, car loans, etc.
Once you’re in a place where you are successfully able to put some amount of money into your investment accounts (401k, 403b, and/ or IRA) each month and you have paid down your lower interest debt, you can then start saving for bigger, sooner goal purchases. This includes a down payment for a home, saving for a car, a wedding fund, having kids, retiring early, starting your own business, saving for a big vacation or trip, etc…
There are a few of different ways you can save for these bigger item purchases:
You can put this money into another HYSA and bucket it toward a new goal while keeping your emergency fund separate.
You can put this money into the same HYSA as your emergency fund, but I personally like bucket systems where I can be certain that I won’t accidentally dip into my emergency fund.
If you are certain you are not going to need access to this money for at least 6 months to a year, you can put this money into a CD account with a maturity date that meets your requirements.
You can also put this money into a brokerage or money market account, but there can be fees involved and higher tax rates to pay, so I personally recommend this last after the above. That’s just me personally, I don’t like fees or higher, unexpected taxes if I don’t need to pay them.
These are more short-term goals (under 10 years) vs long-term investing like retirement accounts.
Now, I know. I understand how you must be feeling if you have to check off all of these boxes - HOW is this going to get done?? HOW can I get all of this done? Believe me, I have been there. I mistakenly took it a little too far by under-eating for a year with the limited food knowledge I had at the time by only allowing myself grilled chicken salads, because I thought it was nutritionally balanced enough.
But rest assured, this financial step-by-step is literally like anything else in life that requires self-discipline. It’s simply putting one foot in front of the other. It’s simply reminding yourself in a moment of “oh gosh I really wan to buy this thing that I don’t need!” of, “nope, slow and steady wins the race".
A perfect real life comparison to this so I don’t seem like the most perfect, well rounded person who has it all together? I am STILL the slowest runner at my gym, but that is okay! I STILL, to this day, always use the mantra mid-workout when I want to quit of, “slow and steady wins the race”.
You just have to keep going, even when it sucks.
Even when it’s boring.
Even when it seems like the least interesting thing that is not working or helping you get to where you need to be. I promise you - slowly putting one foot in front of the other and paying down steps one and two first, are going to get you soaring to the take off point of where you are wanting to go.
Stepping one foot in front of the other - even if it’s the slowest in your group or gym class - is improvement, not a set back in more credit card debt.
