The best way to prevent falling back into debt is by making sure you have enough money to cover unforeseen expenses. Most financial advisors suggest saving up an emergency reserve of cash equal to about six months' worth of your salary. To establish an emergency reserve, you need to learn basics of how to build wealth.
The Wealth-Building Process
Building wealth involves three main steps:
1. Earn money: The amount of money you can save and invest depends on how much you earn. Your goal should be to earn enough money to cover all your monthly expenses and provide a surplus of at least a few hundred dollars.
2. Save money: Set up a savings account through your bank. Your account should have no setup or monthly fees and should pay interest. You should then deposit whatever amount of money you have left over each month into your savings account. Withdraw money from your savings account only for emergencies, such as unforeseen medical bills.
3. Invest money: As your savings grow, you'll soon be able to buy investment products such as index funds and ETFs (explained below), which can grow your money at rates much higher than savings account will.
How to Get Started Investing
To begin investing,you'll first need to set up an investment account,also known as a brokerage account. Once you've saved $500-$1,00 or so(generally the minimum required to set up an account), contact a major financial service firm,such as Vanguard(www.vanguard.com)or Fidelity (www.fidelity.com) to set up an account.
As a beginning investor, consult your financial services firm for guidance on which funds or ETFs to buy before you begin investing.
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