Let’s assume you know the basics of living below your means. You’ve got a job, regular paycheck, and don’t spend all your cash as soon as it enters your bank account. Congratulations, you’ve made it to the first stepping stone to becoming financially independent and responsible. Now you’ve got all this excess money sitting in your checking account; if you’re lucky, hundreds or thousands of dollars. This is great! Now what? Do I keep growing that number into oblivion or am I supposed to do something with those dollars? Here is a useful guide to help you through that process and how to decide which direction you send your money.

Open a Savings or CD Account

A checking account is simple. You have a plastic bank card (or chequebook) and everything you put in goes straight in and everything you spend comes straight out. No strings attached, simple and straightforward. But there comes a time when more is needed. When you decide you’ve got enough of a nest egg, also called an emergency fund, saved up to cover 3-6 months of your monthly expenses should you lose your job, it’s time to put money into savings. The idea of savings is that you accrue higher interest on that savings than you would with a normal checking account.

Most banks offer meagre percentages on their savings accounts. For example, US Bank offers a .01% on rate on their standard savings accounts. What’s the point in even starting a savings account with an interest this low? For one, it acts as a mental tool. Money in your savings account shouldn’t be touched unless absolutely necessary; it’s there for you to save, not spend. Second savings accounts are relatively liquid. You can withdraw money from the savings account as you wish (banks have some restrictions on this so be careful).

A certificate of deposit (CD) is a way to get a higher return on the money you keep in the bank. These accounts have higher interest rates than a standard savings account. The more money you have in your CD account, the more money you make on that amount. The caveat to this is that a CD is not as liquid as a savings account. You can’t regularly withdraw money from these accounts without incurring a fee from the bank. How it works is you agree to keep your money in the CD for a certain amount of time. The longer you agree to keep the money in the CD, the higher your interest rate. You can withdraw money from the CD at the expense of a fee. This works when you have a chunk of money you won’t need in the immediate or short-term future.

Paying off Debt?

Many of us have debt. Debt is not always bad, often-times it is the only way we can reach our goals and dreams. How you accrued that debt – via student loans, new car, mortgage, or even poor choices – doesn’t matter. Debt needs to be focused on and paid off as soon as possible. First things first, get that emergency fund in your back pocket. Now instead of continuing to grow that, put all the money you would have saved towards paying off the debt account with highest interest. Continue to make minimum payments on accounts with a lower interest rate, but eliminate the highest interest debts one at a time. If you’re overwhelmed in debt, debt consolidation or other debt relief options are avenues to consider.

Now What?

Emergency fund is saved, debt is paid off, now what can I do? You’ve completed the first two steps and can now look to broaden your financial goals and horizons. This is the time to think about maxing out retirement: 401K, IRA, Roth IRA, pension fund, and so on. No one wants to work until their life ends and the old dream of retirement on a sandy beach with your significant other is a thought most of us crave for at some point in life. You help make this a reality the earlier you start. When we are young, our income is generally less than it would be when we are older. You may not be able to save up as much as you’d like to, but you can still chip away at retirement contributions. There are limits to the amount you can contribute to your retirement. For example, the maximum amount an individual under 50 years old can contribute to a Roth IRA is $5,500 per year.

After retirement investment comes investing in stocks, bonds, real estate, and beyond. You can read dozens and dozens of books or articles on each of these investment opportunities. Financial advisers are great resources here. They can set you up with accounts and some of the nitty-gritty details before you begin investing.

And there you have it. All it took you to start was saving up an emergency fund and paying off your debts before diving into the world of investment. Don’t presume this will be easy – life takes numerous twists, turns, and setbacks that can make any financial goal a difficult task to accomplish. As everyone learns, life is as simple as you read in a blog post. It takes time, patience, and many instances of a person’s back up against a wall. Do your best not to dwell on the negatives, enjoy the positives, and accomplish your financial goals along the way.