How to Start Saving Money From Scratch

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Should you save money or invest? Should you pay down debt or save?

There can be so many questions when getting started! So today I’m going to be talking about how to start saving money, from scratch! This will serve as a financial roadmap so you can better manage your finances, a money saving plan!

This is what I personally think should be the order of events when it comes to debt payoff, saving for emergencies and saving for retirement. Your management of personal finance if you will.

This 8 step process should help answer any questions you have about getting started on your financial journey. This could be your financial game plan if you will.

Additionally, if you want to use the same budget template for google sheets I use to track all your expenses, check out my Ultimate Wealth Planner! Track your net worth, income, savings and expenses all in one place.

Let’s jump into it.

Table of Contents

Minimum Debt Payments

First and foremost, if you have debt, pay your minimum payments.

TO CLARIFY. If you have a credit card, I’m NOT talking about paying your minimum balance due, no. Pay your credit card off in full every month! Here I’m referring to your monthly debt payments.

For example, if you have a car loan and you are required to pay 200 dollars a month on it, pay that! Those minimum payments are what I’m talking about in this section.

Not paying your minimum payments, on debt, is no bueno. If you’re not paying these minimum requirements it could stay on your record for several years.

It’s better to just pay these off monthly and not worry about the possible repercussions.

3 Month Emergency Fund

Step number two is building a 3 month emergency fund. What is a emergency fund?

Well, it’s exactly what it sounds, it is a pool of money you’re going to save and only use in emergencies. Emergencies meaning, you lose your job or you or a loved one gets sick. It doesn’t mean Cochella tickets are on sale and you want to go for three days so you need money now.

But what constitutes a “3 month” emergency fund? Aka how much money do you need in an emergency fund?

You’re going to want to calculate all your necessary expenses for each month and multiply that by three. The idea is, if you had no income coming in, you would still have enough money (in this account) to sustain your lifestyle for three entire months.

You would have enough money to pay your food, your rent, your health insurance, your car payment, gas, everything you spend on, for three ENTIRE months.

Additionally, you want to keep this money in the bank, but in a high yield savings or checking account. This money is meant to be easily accessible. So when an emergency does happen you can access it when needed. However, leaving your money in a normal savings account isn’t really doing anything for you because of the low interest rates big banks pay.

Find a high yield savings or checking account to hold your emergency fund. Leave it in there and don’t touch it unless it is an actual emergency.

Why is a emergency fund prioritized above debt payoff?

Some people recommend paying off debt first, however I don’t agree with that idea.

If you’re 100% focused on paying off debt, what happens during an emergency? You lose your job and you need to pay rent. What do you do?

Well, since you wouldn’t have any money saved, you would need to get money fast. The easiest way to “get money” when you don’t have any is to use a credit card. However, this just builds MORE debt, at a really high interest rate. Which we don’t want.

Building a steady emergency fund is going to help create peace of mind. You’ll know you’re covered for any situation. Read more about savings account types.

The last thing you want to think about during an emergency is money and how you’re going to pay for things. With an emergency fund you’re covered!

401k Match

You have an emergency fund! Yay! Now it’s time to contribute up to the match of your employer 401(k).

What is 401k plan and how does it work?

A 401(k) is an employer offered, tax advantage retirement savings plan. Your employer directly takes money out of your paycheck and contributes it into this account on your behalf.

This presents tax advantages because your money gets put directly into this account before any taxes are taken out. Your money gets to grow tax free! Additionally, you in turn will end up paying LESS taxes because you’re only being taxed on your salary after this contribution.

Sometimes your employer can offer you a match amount to encourage you to participate in the plan.

How does a 401(k) match work?

401(k) match means FREE MONEY. Employers often agree to “match” your contributions into this retirement account. For example, if you pay 300 dollars into this account every month, your employer will also put in 300 dollars every month, FOR FREE.

This is one of the only times in life you will get free money.

Every employer has a different plan and different match, so make sure you check out your specific plan requirements.

Let’s go through a real life example of a 401(k) match.

My employer offers a 50% match up to 6%. So this means, if I contribute 6% of my salary, they will pay 3%. However, if I only contribute 5%, they will only contribute 2.5%. If I pay 7% of my salary they’ll still only pay 3%. You want to make sure you’re taking advantage of the full match amount.

If you’re not contributing to the full match, you’re leaving free money, that could have been yours, on the table.

Lastly, another thing to note. Many employers have a vesting period for their 401(k) match. This means, although they are giving you free money, you might not be able to access that free money for a certain period of time. Aka, if you quit, or leave the company, you don’t get any of that match amount or you may only get some percent of it.

My personal employer vesting period is three years. You don’t get to keep your 401(k) match unless you remain with the company for at least three years. This is also an important consideration when it comes to 401(k) match.

Additionally, last time I checked my 401(k) my employer match balance alone was over $9,000. THATS A FREE 9 THOUSAND DOLLARS! This is the only time you’ll genuinely be able to get free money!

High Interest Debt (7% or more)

Alright so you have your minimum payments covered, your emergency fund good to go and your employer is giving you free money. Now, you want to start paying off your high interest debt.

Specifically, you want to pay off debt with an interest rate higher than 7%.

You want to be paying off your debt using the Avalanche Debt Payoff Method. This method means you list out all your debt items by interest rate. Highest to lowest. Then you throw any additional money you have at the one highest interest rate, until it is paid off. Then the next highest.

For a longer, more detailed explanation of the Avalanche Method check out this post. Where I explain why the Debt Avalanche Method is better than the Debt Snowball Effect.

Focus on one at a time, and pay them off in full before moving to the next. Until you don’t have any debt higher than 7% interest rate.

Why 7% interest rate is notable.

The average market return annually is 7%. This means your money is worth more in the market than it would be worth paying off debt.

4-6 Month Emergency Fund

Now this recommendation slightly depends on your situation and your risk tolerance.

I personally think having a 6 month emergency fund is a good idea, but I am incredibly risk averse and would want to make sure I’m covered for 6 months if needed. So this recommendation is up to your discretion.

If you feel confident and secure in only having a three month emergency fund that’s ok too. A lot of other personal finance bloggers say having 6 months in an emergency fund is too much and that money would be better invested. Although the money can obviously grow larger in the market, having it ready for an emergency brings peace of mind.

The last thing you want is to be scrambling for money during an emergency.

So I would aim to either have 4-6 months saved or have somewhere between 10 and 15 thousand saved in this account.

Max Out Roth IRA

A Roth IRA is a tax advantage retirement account. The cool part about a Roth IRA is that you pay the taxes now and then don’t have to pay any taxes when you’re taking out that money in retirement!

However, there is a limit to how much money you can contribute to this account. For both 2021 and 2022 the contribution limit is $6,000 a year. Additionally, if you make more than $139,000 a year you might have to jump through some hoops to get into a Roth, called a backdoor Roth, but that’s a post for another day!

So, for number 6, when all 5 other items are fully taken care of, try to max out your Roth IRA every year and contribute $6,000 to this account!

Max Out Traditional 401(k)

Moving right along, your Roth IRA is now being maxed out every year! Let’s bump that up and try to max out your 401k.

As we discussed before, a 401(k) is an employer offered, tax advantage retirement savings plan. Contributing the full amount you’re allowed can give you some major tax breaks!

However, there are limits to how much you can contribute into this account. For 2021, this limit is $19,500 and for 2022 the limit increased to $20,500. Because this is a traditional 401(k) it means your money will not be taxed yet, but will be taxed in retirement, aka tax breaks now.

Quick note: There are ways to get this money out tax free and there are ways to access this money without a penalty before the age requirements! Just so you’re not afraid to max it out!

I started maxing out my 401(k) when I got a 21% raise this year. Because I’m contributing so much more to this account I only pay 20 dollars more in taxes per paycheck, which is pretty cool considering the raise made me switch to a higher tax bracket! More money and less taxes? Hell yes!

Regular Trading Account

Last but not least! A regular trading account.

Once you have a full emergency fund, you’ve paid off high interest debt, you’re maxing out your Roth AND your 401(k) you are ready to contribute to a regular trading account.

This account is for you to invest any extra money you may have.

Investing can be pretty intimidating but making sure your money is in the market is incredibly important. Yes, we have maxed out all the retirement accounts but that’s not always enough for retirement, especially if you’re considering retiring before 65. Let your money work for you and prepare yourself for the retirement you want to live.

Once you have this account set up and you are contributing to it, make sure you are actually investing that money. You need to be going into this account and purchasing stocks or bonds. Alternatively, you can find a robo-investor to do the hard work for you.

I personally use Betterment as my robo-investor. I find it pretty stressful to ensure I’m consistently going into this account and making purchases, staying diversified and keeping up with my investments. So I use Betterment. All I have to do is deposit money and they do the rest!

There is a small fee, but this fee is well worth my time and energy.

I highly recommend using a robo-investor when you’re new to investing. There are several other options besides Betterment including Wealthfront and SoFi so find one that works best for you!

Final Thoughts

These are my 8 recommended financial plan steps to manage your personal finances! Management of personal finances doesn’t have to be intimidating, if you follow these 8 steps you’ll be on a good path!

Minimum Payments
3 Month Emergency Fund
401k Match
High Interest Debt (7% or more)
4-6 Month Emergency Fund
Max Out Roth IRA
Max Out Traditional 401k
Regular Trading Account

It’s easy to not know where to start when it comes to saving money, debt payoff and retirement savings. Hopefully this comprehensive list can help you get started!

Additionally, don’t forget to scoop up my Ultimate Wealth Planner to keep track of your finances all in one place! This is the exact budget template for google sheets I personally use! Or you can join my email list to get access to some free budget spreadsheets and budget printables!