Prioritize emergency savings, retirement savings and debt repayment
Managing your money can feel like you’re looking at an overwhelming to-do list with no idea which task to cross first.
Should You Aim To Pay Off Your Credit Cards Now? Do you need to start saving for your retirement, which is expected to start in 40 years? Are the emergency savings you’ve heard about really this important, especially when you are young and healthy?
The answer to each of these questions is yes. Saving for your future and paying off past debts is not the best situation.
Instead, the idea is to do it all at the same time. But how?
Start by saving
If you are to make it a top priority, it should be establishing a habit that will serve you well all your life: knowing how to save money. It’s crucial to automate this process as much as possible to avoid any extra thinking (and the potential to spend money). Set up direct deposit of your paycheck to a dedicated savings account for emergencies and unforeseen expenses.
The emergency fund plays a vital role in establishing a healthy personal financial ecosystem. By regularly feeding this savings stock, you will have a greater cushion to absorb an unforeseen expense that might otherwise add to your credit card debt.
For example, if you need to do a $ 2,000 auto repair tomorrow to make sure you can get to work, the ability to tap into your emergency savings fund is crucial. This means that you can avoid putting that $ 2,000 expense on a credit card with a 15% interest rate.
Don’t miss out on any retirement savings benefit
Since you are saving for what you don’t want, you should also save money for what you don’t want. to do want to see on the horizon: the freedom to enjoy your time after your years of work are in the rearview mirror. If your employer offers a 401 (k) or other tax-advantaged pension plan, take advantage of it through payroll deduction and be sure to inquire about match possibilities. Contribute as much as possible to maximize this benefit because it’s something everyone should love: free money.
If you don’t have an employer-sponsored retirement plan – or have the opportunity to save even more – set up automatic transfers from your checking account to an IRA to get government tax benefits for your retirement planning. responsible retirement.
Aim for the 10-15 percent rule
Between your emergency savings and your retirement plan, you should aim to contribute between 10 and 15 percent of your monthly income.
Reaching that mark will be difficult until you’ve reduced your high-cost debt to zero, but here’s the simple tip to remember from day one: don’t put off your savings until you’ve paid off your money in full. your debt. Any delay means you will miss out on valuable compound growth. And if you delay once, you risk delaying over and over again. So put something away now – every dollar counts – and regularly review your budget to see if you can save even more.
Develop a game plan to beat the debt
The savings strategy can be a routine to put in place and forget, but tackling your debt will require more energy and attention.
There is no one-size-fits-all approach to getting out of debt, but there are two starting points to consider. Both are rooted in analogies to winter weather, so think of it this way: embrace hard work in the cold now to get you on your way to sunnier days at the beach later.
- The avalanche method: From a purely financial standpoint, you will minimize financing costs by starting with the debt that has the highest interest rate. Spend as much money on it as possible while making the minimum payment on all others until it is paid off. Then move on to the next highest interest rate. You go down the mountain of interest rates from top to bottom, much like the avalanche.
- The snowball method: Instead of focusing on the interest rate attached to it, the snowball method focuses on the balance. You will start by committing as much money as possible for the smallest balance you are carrying while making the minimum payment on your other debts. When the first balance reaches zero, go to the next smallest balance. The amount you contribute towards a debt will snowball as you pay off each balance. Plus, the morale you can get from seeing every zero balance can inspire you to keep snowballing.
Remember that not all debt is created equal
As you work to free yourself from debt, it’s important to recognize that certain types of debt don’t need to be high on your priority list. If you’re paying off a 30-year mortgage with a 3% interest rate, there’s no rush. Of course, it can be nice to see your capital decrease, but you could also get a higher return by investing that money. Plus, you get a return on that debt by increasing the equity in your home.
Don’t let today’s mistakes be tomorrow’s regrets
Juggling savings for multiple reasons and reducing your debt can seem daunting right now, but getting the job done will put you in a position for less stress in the long run. Just ask others who have been in your shoes: Almost 40% of those polled in Bankrate’s recent financial security survey cited not saving enough – whether for emergencies or retirement – as their biggest financial regret.