What Are the Financial Ducks?
Updated: Oct 4, 2022
"When should I start investing?" This is a question I often get from students who are looking to build wealth. For most people, investing should start as soon as possible, but you need to get your Financial Ducks in a row first.
I created the "Financial Ducks" concept after working with women who thought they could invest and make enough money to pay off their credit card debts. In my opinion, this is not the fiscally intelligent approach. It's like going to Las Vegas to earn money to pay off your debts. Suppose you are paying 18-23% APR interest on credit card debt; the best idea I have is to pay that balance down ASAP.
The earlier you invest, the more wealth you can build. But this doesn't mean you should start investing without a plan. You need to follow certain steps to be successful. This is where "Getting those "Financial Ducks" in a row" comes in, which sets the foundation of your financial life.
Financial Duck #1: Budgeting
A budget helps you create a plan, manage your household's finances and gauge whether you have achieved your goals in the desired timeframe. Budgeting gives you a clear understanding of the money that comes in and how it goes out.
You can start building a budget by analyzing your financial history. How and what have you been spending on? A budget tracker like the Mint App can help you keep track of your spending!
Take the time to determine what expenses are needs, wants, and those you can eliminate. In the 50/30/20 method, 50% of your income is used for "needs" like groceries, mortgages, and recurring bills. 30% goes to "wants," while 20% goes into savings. You can download the HerFinIQ Budgeting Workbook to use the 50/30/20 budget rule and modify it according to your situation.
Financial Duck #2: Identifying Savings
After building your budget, it is essential to figure out how you will save towards an emergency fund, pay off bad debt, and achieve your investing goals. You can identify habits - such as shoes, make-up, candles, eating out... whatever that habit is. You can save significantly by cutting the habit out of your spending allowance. Start small, then challenge yourself to go bigger. If you are having issues" coming up with ideas - download my free "Budget Tips" Resource.
Financial Duck #3: Paying Off Bad Debt
Investing with bad debt means you'll pay more interest than your return on investment, especially if you have debts with APRs of 13% or even more. Make a plan to pay off any bad debt or high-interest loans by putting away as much extra money as possible towards it. Once your debt is gone, you can point your savings towards an emergency fund or invest excess cash and enjoy the return on your investment. I talk more about this in my Investing $ense FREE mini-course.
Financial Duck #4: Establish an Emergency Fund
In life, you may experience unexpected expenses like job loss and emergency home or car repairs. For these types of setbacks, it is essential to have cash or an emergency fund on hand to cover that.
Stock markets are volatile, so the longer you keep your money there, the higher your chances of overcoming market downturns and building wealth over the long run. That means you should be careful investing money that you're likely to need in the short run, say less than five years.
Your emergency fund acts as a buffer between unexpected costs, high-interest credit cards, and taking money out of the markets at a loss. The emergency fund should ideally cover three to six months of your typical living expenses.
Financial Duck #5: Cultivate Your Credit Score
Your credit score can influence more than just the loans you qualify for and the interest rates you pay for the loans. Insurance companies use credit scores to set auto and homeowners' premiums. Employers, landlords, cell phone carriers, and utilities use these financial report cards to determine your fiscal health. Cultivating your credit score will also save you a significant amount of money you can invest.
Once you get your "Financial Ducks" in a row, the next step includes figuring out how much to commit to building wealth and the investing strategies and accounts that are best for you. Investing may seem hard, but it is doable with the right plan. Luckily, HerFinIQ Students discuss and work on the "Get Investing Before 2023 Challenge" in the new online self-directed "Before Investing" course!
Thanks for reading my blog - and if you find these topics interesting, check out my - "Her Money + Investing Show" episodes.
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Disclaimer: Jessica Perrone is not a registered investment professional nor a financial advisor. This content is for educational purposes only and is not investment, tax, or financial advice. Always do your own research. You are solely responsible for all investment, tax, and financial decisions that you make. Please read the full disclaimer here.