1. Start building an emergency fund
Unexpected expenses may pop up from time to time, so one of the best things you can do is make sure you're financially prepared for them. An emergency fund is money that you use for unforeseen expenses, like a medical bill, job loss or an unexpected home repair.It can be a crucial part of wealth building because it is designed to help you cover these surprise costs without having to take on additional debt. So instead of defaulting to a credit card or a personal loan to pay for an emergency, you can pull from a fund you saved specifically for these instances.It's also a good idea to encourage your family members to create emergency funds for themselves as well. Being a first-generation American often means carrying the expectation that you'll intervene financially if your parents or siblings need the help. And while it's important to lend a hand when you can, you can still wind up stretching yourself too thin when you're always using the money you saved to help others.Experts typically recommend having three to six months' worth of expenses in an emergency fund. So if all your necessary expenses for the month (like, rent, food, utilities, bills, medications, etc.) add up to $2,000, you should aim to have an emergency fund that's around $6,000 to $12,000. It seems like a lofty number, and though it may take a while before you have a fully funded emergency savings account, the money will come in handy when you need it most.Pro tip: Save your emergency fund in a high-yield savings account so your money can earn interest and grow a little quicker -- even when you aren't making contributions to it. Currently, Ally Online Savings Account and Marcus by Goldman Sachs High Yield Online Savings both offer 1.85% APY, which is a lot better than the interest rate on a traditional savings account.
2. Open up a Roth IRA to start growing tax-free money for retirement
It's not always easy to save for retirement. In fact, I don't remember my parents ever really speaking to me about preparing for retirement -- in our culture it's normal for parents to be supported by their adult children in their old age. But regardless of whether or not you plan to financially support your parents when they're older, it's important to make sure you have the money to support yourself in your golden years.The cost of taking care of an aging parent will vary depending on their needs. But adult children spend an average of $70,000 out of pocket in order to care for parents until death, according to a report from the Urban Institute.A Roth IRA is a powerful tool you can use when it comes to saving for retirement. The after-tax money you contribute gets invested and grows over time. And when you withdraw the money in retirement (after age 59 1/2), you won't pay any taxes on it.The sooner you open up your Roth IRA, the better. That's because your money will have more time to compound. As an example, if you open your Roth IRA today, invest $100 and contribute just $3,000 each year (assuming an 8% annual return), in 30 years you'll have $715,024. However, if you follow these same steps but only give your money 20 years to grow instead of 30 years, you'll only end up with $137,752. That 10-year difference can wind up costing you over $500,000.
3. Pay attention to your employer's 401(k) plan terms
Unlike a Roth IRA, a 401(k) is a retirement account provided through your employer that uses pre-tax money to help you save for retirement. And unlike a Roth IRA, you will pay taxes on any funds you withdraw from your 401(k) in retirement.But what makes it a great wealth-building tool is that it uses the power of automatic savings, and your contributions can potentially be matched by your employer so you can grow your savings even faster.However, it should be said that it's important to make sure you understand the terms of your 401(k) plan -- often even before you accept a job offer. Not all employers offer a match, which means you can end up with a lower balance than you would have had if an employer did offer a match.
You should also make sure you know how much you need to contribute in order to qualify for the match, otherwise you could be leaving extra money on the table. Finally, make sure an employer's 401k plan has a wide variety of investment choices and low fees.
4. Invest in index funds
Investing your money is arguably even more important than saving it. That's because keeping all your money in a savings account can cause you to miss out on much bigger returns from the stock market.There is always some risk when it comes to investing; many people tend to shy away from it because they're afraid of picking the wrong stocks. However, index funds can help you get some skin in the game without forcing you to pick individual stocks.
An index fund is a basket of stocks and/or bonds that's designed to track a particular index, like the S&P 500. According to Investopedia, the S&P 500 has historically returned an average of 10% to 11% annually, so you might expect a fund tracking this index to produce similar returns.Now let's do the math. If you open up a brokerage account, put in an initial investment of $100 and then invest just $300 per month in an index fund returning 10% per year, you'll wind up with $399,256 in just 25 years after contributing just about $90,000.
