To Build Wealth on a Low Income, Start With an Emergency Fund – Business Insider
Dyana King, 30, knows how hard it can be to prioritize financial goals when you’re living paycheck-to-paycheck, especially if you have kids to feed.
A few years ago, King, a single mother of two, decided to commit to working on her finances while being $35,000 in debt and making $15 per hour. She ended up paying off her debts completely, and now has a net worth of almost $80,000.
She has a blog and YouTube channel called Money Boss Mama where she talks about her own financial journey, and counsels other single moms with fixed income to hit their goals like she did.
But where do you begin when you’re starting from scratch? When asked what to tackle first as a low income earner, King told Insider that there is one thing you need before working on any other aspect of your finances: an emergency fund.
“If you don’t have at least one month’s worth of living expenses saved up, that definitely has to be first,” King said.
Emergency funds are for unexpected financial hits — like a car being totaled, a major medical expense, or the loss of a job. The cushion these savings provide is something that anyone can benefit from, but may be particularly important for people who don’t have a lot of income. Not having any cash on hand when an emergency hits can cause people to turn to expensive solutions like payday loans, which could end up putting you in even more debt.
Typically, financial advisors recommend that you have at least three to six months’ worth of living expenses in your emergency fund. However, King said that when you’re dealing with clients who are barely scraping by, if you set the goal too high, it becomes overwhelming and the client may feel defeated before they even begin.
“When you’re dealing with someone with low income, it can be very hard for them — their debt is killing them, it’s causing them anxiety,” King explained. “If you sit there and tell someone on a low income that you need three to six months worth of living expenses, they’re gonna be like, ‘Okay, well then I’m just not gonna do this,’ so prioritize just that first month.”
After you save up a month’s worth of living expenses for an emergency fund, King said that paying off debt, saving, and investing can all happen in small increments at the same time.
“When it comes to debt and investing, I always say you can do both,” King said. “I’ve always saved and paid off debt at the same time.”
She added that the most important aspect to paying off debt on a low income is just being consistent, having a plan, and an estimated end date in mind. As long as you have that, you can send extra any extra money in your account to padding your savings.
She also recommends putting away a little bit of money into your 401(k) even if you have some debt. However, it’s important not to go overboard and get distracted by having too many goals going on all at once. “When it comes to mutual funds, ETFs or things like that, I would say it’s probably be best to wait until you have the majority of your high interest debts knocked out first,” King added.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer. Read our editorial standards.
Please note: While the offers mentioned above are accurate at the time of publication, they’re subject to change at any time and may have changed, or may no longer be available.