An important first step toward building a solid financial foundation is to establish a cash reserve or emergency fund.
A general rule of thumb for this reserve is an amount equal to 3 to 6 months of your living expenses. This cash will allow you the freedom to pursue your life goals with fewer setbacks should an unexpected event take place (e.g. the washing machine just died, the brakes went out on the car, or a beloved pet needs surgery). These types of life events happen much more frequently than we would like, and they ultimately set you back financially if you do not have an ample cash reserve to manage them.
This cash reserve should be liquid, which means it needs to be available and accessible on short notice. It is understandable that if you have a nice lump of cash sitting in an account, you may feel the need to do something productive with it. However, remember that this cash serves a purpose by not being invested. Because this cash reserve is set aside for emergencies, it is not advisable or prudent to put this money at risk. There is a quote I once heard that seems apt for this situation, “I am not so concerned with the return on capital as I am with the return of capital.”
After you have established your emergency fund, then you can start moving more confidently into the other areas of your financial plan.