Financial Fortress - Laying The Foundation
The foundation of your Financial Fortress is composed of two major components: cash and "good" debt. "Good" debt is money that you borrow for investment purposes. There are many sources of good debt, including a mortgage, 401(k) loan, online sites such as Prosper.com, personal bank loan, friends/family, etc. If you have a great investment or business idea and put your mind to it, you can find a source of financing. "Bad" debt includes car loans, credit cards and personal loans that are taken out to buy clutter or things that don't put money back into your pocket either in the form of positive cash flow or a profit upon sale. Bad debt should be paid off as soon as possible. Why keep cash in a bank account that earns less than 1% when your car or credit card loan is many times higher than that? Cash is also critical for the foundation of your Financial Fortress. Your focus should be to increase your positive cash flow by using a budget, eliminating "bad debt" payments and carefully managing how much you spend. By saving money every month automatically (some call this "paying yourself first"), you can build your savings. Try to earn some yield on your cash, but be careful not to put too much in short term bond funds or money market accounts - they could lose value and if there is another financial crisis, you will be glad to have your FDIC insured accounts. There are opportunities to earn a higher yield without taking on too much risk.
By the way, if your company offers a 401(k) match, you should contribute enough to take full advantage of the match since that's really "free" money. I don't really like 401(k) investment options, but you can always roll over into a self-directed IRA when you take a new job and you'll have more options.
By using good debt, you don't need much of your own cash to make an investment. For example, you can buy an investment property worth $100,000 with $25,000 down and a bank will finance the rest. You control an asset worth 4x the amount you invested, which over time with inflation will grow in value. If properly managed, your property will maintain and grow its positive cash flow and you could enjoy reduced taxes from this kind of investment. The advantage of having positive cash flow is that you can withstand short-term fluctuations in value and continue to build the foundation of your Financial Fortress.
When investing, always think cash flow. It's often tempting to buy a stock that you think will go up in value so you can sell it, but that's market timing or speculation. Positive cash flow is always better because it adds to your foundation, allowing you to make additional investments.
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