Five financial building blocks to make long-term goals less daunting

Building your financial wealth is akin to building a house: You need the foundation before you can choose wallpaper, add a fireplace or decorate. 

When it comes to saving for your long-term goals like a down payment or comfortable retirement, consistency is key. But before you can throw extra funds into a brokerage account or invest in real estate, there are building blocks you need to have in place — and even those can feel intimidating. 

“For many people starting out, any thought around personal finance can feel overwhelming,” says Hillary Stalker, executive vice president and financial advisor at CapWealth in Franklin, Tenn. “With information coming at us through so many channels, it’s hard to know who to listen to and where to start.” 

But there are a few basic steps you can take to make it feel less daunting. 

1. Create a budget 

The first step is to assess your current financial situation and understand what you are bringing in as income and what is going out as expenses. Stalker says to start with your take-home pay after taxes and deduct any expenses you know are a must, such as your rent or mortgage, utilities, car payments, phone bill, student loans payments and groceries. Then, calculate how much of your income is left over each month. Whatever is left is what should be budgeted for savings and discretionary spending like entertainment and going out to eat, Stalker says. 

You can review your credit card and bank statements to get a sense of how much you're spending on categories like dining out, entertainment and transportation. Many consumer financial platforms, such as Current, offer tools on their websites or apps that will automatically break down your spending so you can easily analyze where your money is going each month, and whether you’re spending too much in one particular category. To create your budget, you can go old school with a spreadsheet or pen and paper, or use the budgeting feature directly in the Current app, which you can access from the spending tab. From there you can see your cash flow in and out every month, how much you’ve spent in each category from food to transportation and set budgets for any categories you chose. You’ll then get a notification when you get close to your budget, to help you stay on track.

2. Build an emergency fund 

No one wants to think about facing a financial emergency like unexpected job loss, a surprise medical bill or an accident that requires a car repair. But planning ahead could be the difference between being able to cover the cost of your everyday essentials and struggling financially. 

“As much as we like to believe we are all exempt from accidents, we need to set aside money ‘just in case,’” Stalker says. Most financial advisors recommend setting aside enough money to cover three to six months of your living expenses. “If you are just starting out, take some of the funds you have left after expenses are covered each month and move it to savings until you have the ability to build that account up.”

You should keep your emergency fund in a liquid account that you can access as soon as you need it, such as a high-yield savings account, which allows your money to grow even as it’s sitting idly. With Current, you can earn a bonus of up to 4.00% on the money in your Savings Pods.

3. Pay down debt 

Next, it’s time to tackle your debt. While it may make sense to pay off some debt — such as student loans or a mortgage — slowly over time while you pursue other financial goals, paying off high-interest debt like from credit cards should be a top priority. Credit cards’ annual percentage rates are often 20% or higher, which can make a huge dent in your wallet. 

There are two popular strategies that can help you chip away at balances: the snowball method and the avalanche method. With both methods, make sure you’re always making the minimum payments. Then the snowball method entails paying off the debt with the lowest balance first, then the second-lowest balance and so on. The idea is that getting small wins will encourage you to keep paying off your debt. 

The avalanche method involves paying off debts according to their interest rates, no matter the balance. You’d start by focusing on the debt with the highest interest rate, then moving on to the one with the second-highest interest rate and so on. This method typically allows you to save the most money on interest over time, and pay your debt off faster. 

4. Take advantage of retirement savings matches  

Setting aside money now for retirement can make a huge difference for your golden years. 

“It may seem far off and something you do not have to worry about now, but the sooner you start saving, the faster it grows thanks to compound interest,” Stalker says. Many employers offer to match your contributions to a 401(k) or similar retirement account up to a certain amount, so it’s important to at least contribute enough to receive that full match. “Even if that is all you can afford to do, your future self will thank you.” 

You should also increase the amount of money you save in these accounts regularly, if you can. 

“If you get a 3% raise this year, raise your contribution rate by 3% too,” says Kyle Playford, an advisor at Freedom Financial Partners based in the greater Minneapolis-St. Paul area. “More dollars in the 401(k) means compound interest works harder for you.” 

Compound interest refers to the interest you earn on interest, and it’s what can power your retirement savings to grow significantly over time. 

5. Create an estate plan 

Finally, Playford recommends developing an estate plan, which includes a will or trust as the most basic form. These plans can also include a financial power of attorney, which allows you to appoint someone you trust to manage your finances if you can’t, and a health care directive, which outlines how you want medical decisions made if you can’t make them on your own. 

Planning for the worst can feel scary, but doing so can help protect your assets and loved ones. Without a will or a trust, state law decides where your assets go should you pass away, Playford explains. Certain assets, such as life insurance and retirement savings plans will pass directly to your beneficiaries, as long as you have filled out associated forms correctly. But some assets, such as after-tax brokerage accounts or property, may not go to who you want them to go to unless you specify. 

“You own the asset now,” Playford explains. “Tell the state what you want to have happen with it versus the state telling your loved ones who gets it.”