How to Get Your Finances in Order
Should you pay the debt or put it off for a rainy day? Throw away some of your student loan balance or put some extra money on your credit card debt? Focus on your savings account or save for retirement?
There is no “right” way to clean up your financial house. Your priorities are different from mine, and my financial reality is different from yours. But with that in mind, there is a general financial path that makes sense for many to follow, and that you can tweak as needed.
Here’s the order in which I would prioritize:
The basics
Your necessities are non-negotiable expenses. Your rent, food, transportation, student loans, health insurance, credit card minimum payment, cell phone, etc. All of these must be paid off before you can even consider working on other goals.
Save $ 1000
Ideally, your emergency fund should cover the costs for several months. But if you’re just starting out – or recovering from a setback – focus on saving at least a huge amount. This is important and puts you ahead of more than half of the US adult population.
You can enter the exact number here. If you’re more comfortable with $ 1,500, $ 2,000, or $ 4,000, focus on that. Again, these are your priorities. But $ 1,000 is a good start when you are juggling with a few monetary goals and have limited funds (that is, you are one of 99 percent).
Invest for retirement
When you have everything you need and have accumulated a convenient amount in an easily available rainy day fund, your next priority will be a retirement account. This could be a 401 (k), IRA, Roth, or if you are self-employed, a SEP IRA . If you have a 401 (k), make the contribution at least up to eligibility for the employer. If you have any type of IRA, the amount you contribute is up to you, but aim for five to 10 percent of your salary.
Solving the problem of high interest rate debt
Once you save a little and get a little closer to your 401 (k) each month, you can speed up your debt payments. Remember that you must pay at least the minimum amount due each month, no matter what, in order to stay in good standing with your bank or lender.
This is the part that may seem counterintuitive. Why work off your debt when you only have a tiny amount in your emergency fund? This is a good question, and if you are more comfortable with saving more first, then go for it. But I would think of it this way: Obviously, high-interest debt costs you even more money every day it goes unpaid. Therefore, this is an emergency, so it makes sense to use the money that you would save to pay for it.
If something happens, you can put it back on the card and start over, but at least you are working to save on those debt costs. This means paying off your credit card prior to paying off your student loan if you have both. If you have multiple cards, focus first on the one with the highest debt.
If something happens, you may not be able to pay the rent, for example, on a credit card. This is why it’s important to pay for everything you need first (and if your rent is over $ 1,000 a month, put off at least one month). But as long as you have a solid base of $ 1,000 or so, work to pay off any debt to save more in the long run.
“If your credit card interest rate is 15 percent [or higher], then channel as much of your cash flow as possible to pay it back immediately,” Greg McBride, chief financial analyst at Bankrate , told me earlier this year . “It’s a risk-free 15 percent return.”
Add to your emergency fund
Once you’ve paid off your debt in full or through a sustainable repayment plan, redirect some of those payments or any additional funds you have to your emergency fund. Accumulate up to those four to six months of expenses that every expert recommends saving.
Invest more
After you’ve paid off your debt (or, again, developed a sustainable plan) and built your emergency fund, it’s time to invest more if you can. This could be a pension, a taxable account for a short-term purpose, 529 points for your kids’ college , etc.
These are just sketches for getting started getting your money in order or recovering from bad luck. It doesn’t take into account goals like saving for a home or kids, but it’s a good place to start if you don’t know how to prioritize your many finances.