You have heard it all before: “You need an emergency fund,” “You need to save for retirement,” “You have to invest.” But when you have debt and a tight budget, figuring out how to accomplish these goals can be challenging.
Read on to find out how to get started and prioritize your money.
How to Handle Your Money in 5 Steps
When it comes to designing a game plan for your money, it’s important to think strategically. To come up with a plan that works for you, follow these five steps:
1. Think About Your Goals
First, think about your financial goals, like:
- Do you want to buy a home?
- How important is travel to you?
- Do you plan on having children?
- At what age do you want to retire?
Your answers to these questions will help you design an effective strategy.
2. Set Aside Some Money for an Emergency
Once you have your goals in place, the first step you should take is to start building a small emergency fund.
According to the Federal Reserve, nearly half of all Americans don’t have enough money to cover a $400 emergency. If something happens, like illness or a car repair, you might need to turn to costly alternatives, like a payday loan or high-interest credit card.
Ideally, you’ll save between three and six months worth of expenses. But, if you have debt, set aside just $1,000 to cover any small emergencies and put the extra money toward debt repayment.
3. Take Advantage of Employer-Match Retirement Plans
The majority of Americans have less than $1,000 saved for retirement, and approximately half the population has nothing saved at all. If you’re behind, that could leave you in a bad position when you reach retirement age.
Once you have a small emergency fund saved, check to see if your employer offers a retirement contribution match on a 401(k) or other retirement account. Some employers will match 100 percent of your contribution up to a percentage of your salary. For example, pretend your employer gives you a 100 percent match up to 10 percent of your salary, and you make $50,000. You contribute $5,000 of your income to retirement, so your employer would contribute an additional $5,000 to your account.
It’s important to contribute enough to get the maximum employer match, because it’s free money you would otherwise leave on the table.
4. Pay Down Debt
After establishing a $1,000 emergency fund and contributing enough money to qualify for the full employer match, your next focus should be on debt. Whether you have student loans, credit card balances, or a personal loan, the interest rate you pay on your debt far exceeds what your money earns in savings.
You’ll earn more of a return paying down debt than you would letting your cash sit in the bank. Plus, getting rid of debt is a guaranteed return. Although you could lose money investing, paying down debt ahead of schedule will always save you money.
5. If You have Money Left, Invest Strategically
Finally, if you have money left over, you can consider investing in addition to your employer-offered retirement plan. You could choose to invest in another retirement account, such as a Roth IRA, or you can invest with a roboadvisor service, like Betterment, to build a portfolio.
Getting Your Financial Life in Order
When you’re just starting out, figuring out what goals to tackle first can be tough. By following these five steps, you can take charge of your finances and build a solid foundation.
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