So you have a few dollars to save, pay off debt, or invest for the future. What do you do with money to be able to reach your goals as quickly and easily as possible, and not waste time or money on bad decisions?
Step one: your emergency fund
He has received an inheritance of $ 50,000. What do you do with the money? Yes, you could buy that big screen TV and that sound system, and take a big vacation, but what if you wanted to make great progress on your goals and not let the money go to waste, little by little?
He has $ 500 left after paying his monthly bills and other fixed expenses, and sets aside money for gas, food, clothing, and other necessary expenses. You can spend this money on little luxuries, pay more on your mortgage, or save for retirement. How do you make the decision?
The first priority should be to set aside money in your Emergency Fund. Yes, even before you pay off your credit card debt (unless you are delinquent or delinquent on your bills, then pay them enough to update them first).
Regardless of how much credit card debt you have, the first step to creating a prosperous future is to change your habits. When an unexpected bill comes in (and it always does), you should have money in your Emergency Fund to pay that bill, in order to avoid accumulating additional credit card debt. If you’ve spent every extra dollar trying to pay off your debt and you don’t have any money set aside, when the unexpected happens, you’ll rack up even more debt and get back to where you started.
Your Emergency Fund should contain three to six months of your actual living expenses. Or more … I have some clients with up to a year of cash reserved; they are generally risk averse, self-employed, or have a fluctuating income stream. Its amount is not three to six months of your salary; are the bills and necessarily the expenses that you would have if you could not generate income. These funds must be kept in a cash account, usually a savings or money market account. The Weinstein Family Emergency Fund is housed in an ING Direct Orange savings account.
A home equity line of credit (HELOC) does not count. Yes, you can use a home equity line or apply for a home loan if you are unable to generate income or have emergency expenses. But, it would just add to your monthly expenses and debts. And, since interest rates have risen, even the tax deduction doesn’t offset the high expense of using HELOC.
Once you have a well-established habit of saving money each month and have set aside your Emergency Fund, we can move on to the next step: prioritizing debt and your life goals.
Step one action:
Open a dedicated savings account or emergency money market funds. Set aside a fixed amount of money each month, whether it’s $ 50, $ 500, or $ 5,000, until your fund is three to six months away from your living expenses.
Step Two: Pay off “Bad” Debt
You have created your Emergency Fund and made a wonderful habit of saving $ 50, $ 500, or $ 5000 every month. We don’t want to let that habit go away … so where do we put your money now?
Step 2 is to pay off any “bad” debt. What that really means depends on the person and their tolerance for debt. Some people are not particularly concerned about debt, so their only “bad” debt is those with high interest rates or minimal tax advantages (non-mortgage and student loan debt).
There are two situations where I can ignore the interest rate and recommend that the client pay off the debt as soon as possible.
(1) Loans from family or friends. These loans, while low-interest, may be eroding the relationship, without your knowledge. They can reduce the relationship to a formal, tense, and money-based transaction, rather than a loving, friendly, and supportive bond. You may know that debt is a problem or ask other relatives to see if debt is a problem in the family culture; if so, pay it quickly.
(2) Debt that keeps you awake at night or makes you feel like a failure. Debt may be the new “American way,” but it is not right for everyone, not even most people. Monthly payments, or even the thought that you might be garnished or garnished, may be eating you up overnight. You may feel venerable or like you’ve never achieved any of your goals until that debt is paid.
If this is you, your debts can become a high priority, even over other goals, like financing college or buying a new home. Whether your debt should be paid off as a high priority depends not only on the interest rate, but also on the mental and emotional interest rate you are burdened with each month you make loan payments.
Action step two:
Take a personal inventory of your debts and how much they cost you in mental and emotional energy. They bother you? How much? If so, regardless of how low the interest rate is, paying them off should be a high priority. Get started today: Pay an additional $ 10, $ 100, or $ 1000 on principal each month. Even better, set up automatic bill payments in your online bank account bill pay system to make automatic additional payments each month or quarter.
Step Three: Goal Financing – Base Level
Now you’ve created your Emergency Fund and paid off your “Bad” Debt, including a loan from a family member, a high-rate credit card, and old college debt that was really bothering you.
She has a ton of goals: to retire, pay off her mortgage, buy her next home, launch a new business, and send the kids to college.
What comes first? Retirement? Children? Paying your debts? How do you decide?
Step 3 of Where to Put Your Next $ 1 is to fund your goals, in order of priority, at the base levels – the amount of money you need to meet the minimum requirement of your goal.
For example, how much money do you need to pay your bills in retirement, not to live an extravagant lifestyle, not to play golf every day for 20 years, not to travel the world, but how much to keep in a box of cash? cardboard and live comfortably?
How much money do you need to save to send the kids to State College, as opposed to the Ivy League? How much would the home you need cost compared to the home you want?
Then fund the minimum base level of those goals in order of priority. This may mean that you start by contributing to your retirement plan or IRA, then contribute to a 529 Plan for the child’s college education, then set aside money on a CD to start a business in 3 years, and then finally invest to raise funds for A bigger house.
How do you decide the order of priority? First, determine if there is another way to pay for the goal, besides your own savings; if so, it is probably a lower priority than goals for which you have no alternative. For example, loans are readily available for college education, but not for retirement (with the exception of a reverse mortgage). In addition, you can obtain investors or apply for a loan to finance a new business and pay them off with the new stream of income.
Second, assess whether you are giving up “free money” by not using pre-tax or matching savings or retirement plans. If you can save before taxes, the federal government is contributing to your goal (since you don’t have to pay those taxes), and if you don’t take advantage of this every year, you’re leaving money on the table. . Similarly, if you are lucky enough to be employed by a company that matches a 401 (k) plan, you may want to contribute at least the matching match, to “allow” your employer to help fund your retirement.
Action step three:
Make a list of your goals, in order of priority. Look at your goal n. 1: is it really the most important or is it the first in the order of time? Any special type of accounts or concordance available for this purpose? How much will your goal cost? What is the base level for that goal?
Set aside money each month to fund the base level of your goal n. # 1: Use your automatic investment or savings plan to take this week’s Action Step.
Step Four: Beyond …
You have depleted your Emergency Fund, paid off your “bad” debts, and funded the minimum levels of your most important life goals. Great job! Whats Next?
Step 4 is to fully fund your goals, in order of priority. For example …
* Maximize your Roth IRA, if eligible. * Max out your 401 (k) and IRA (yes, you can do both, the IRA may not be deductible). * Buy ESPP shares (and don’t forget to sell and diversify regularly). * Contribute to a 529 Plan and / or a taxable investment account for college education. * Invest in tax-advantaged or taxable accounts for various future goals or additional retirement funds. * Purchase of investment real estate and / or rental property. * Pay your mortgage. * Buy CDs or vouchers for specific and dated purposes. * Leave money in your health savings account, invested and tax-deferred, until you can roll it over to an IRA during retirement.
Wow, do you still have money on the table? Marvelous! If your goals are already funded, don’t forget to enjoy your money now. Take a first-class vacation, hire an errand service for a few hours a week, buy a new sound system, or make a significant donation to your favorite charity. Balance saving for your future goals with living life now.
Step Four Action:
Choose your highest priority goal in Step 3. Have you fully funded this goal to achieve your ultimate dream? Assess whether you have funded the minimum level of your other goals. If so, choose an action step from the list above … and enjoy your prosperity!