When it comes to your financial game plan, it can be difficult to know where to start.
Perhaps you have debt, but you also need an emergency fund, but you also want to buy a house and save for retirement and go on vacations and pay off student loans — and on and on the list can go.
If you think this way, you’re not alone.
Financial priorities are a big-picture overview of what should happen — and when — with your finances. It can feel overwhelming.
PSA: Financial Priority Zero should be paying your bills. This includes your minimum credit card and loan payments. Before tackling any of the following, I’ve always ensured I can take care of my normal bills first.
Financial Priority #1: The Emergency Fund
A golden rule for an emergency fund is to have 3-6 months living expenses saved, typically hanging out in a high-yield savings account, or a highly secure, liquid and flexible account. These interest rates have declined this year, but may rise again once the economy is on stronger footing.
Even if you have a mountain of credit card debt, it is commonly recommended to get at least three months of living expenses in your emergency fund before you move on to the other steps. You don’t want to go deeper into debt trying to pay for an emergency. Emergencies happen and some events can’t be paid off with a credit card. People also tend to be in a better mental space when they’ve got at least a little bit of green in the bank.
Financial Priority #2: Pay off High-Interest Debt
High-interest debt includes any credit cards, payday and personal loans you might have. Continuing to pay interest on debt that has over a 7% interest rate can be considered paying high-interest debt (credit cards usually start at 15% interest). We recommend paying off high interest debt before investing, as some high interest rates can outstrip potential market returns.
Financial Priority #3: Pay Off Low-Interest Debt WHILE Saving for Retirement
Low-interest debt can be considered to be any debt racking up less than 7% in interest (for instance, student loans, car loans and mortgages). You want to be paying that off while also beginning to save for retirement. Low-interest loans for assets like cars and mortgages can take years to pay off. The key is to make sizable monthly payments that don’t impede on the rest of your financial situation.
With an emergency fund set and higher-interest debt gone, now you can start focusing on paying off lower-interest debt, while saving for retirement or other big life goals.
Financial Priority #4: Save for the Big Stuff
Once you’re actively investing and paying down your lower-cost debt, start saving for the Big Life Stuff such as a down payment on a car or a house, having kids, getting married, taking a dream vacation, starting a business or retiring early.
If you’re aiming to achieve your goal in 10 years or less, it can be recommended you keep the money you’re saving for these goals in a high-yield savings account or certificate of deposit, instead of investing that money. (A certificate of deposit, or a CD, is a savings account with a higher interest rate, but in exchange, you cannot access your money for a certain period of time.)
An Exception to the Order of Priorities on This List?
If your employer offers you a match on your 401k or 403(b) retirement savings accounts.
I’ve always been advised to contribute to these accounts to get the “employer match” before paying off debt, because that is essentially free money. It may make sense for you to take advantage of it, even if it means trumping the order of this list slightly.
With the current state of the economy, right now is the perfect time to be sorting out your financial priorities. Still feel overwhelmed? Help yourself out by using financial tools like Personal Capital for your finances. Start reducing your bills, avoiding extra charges, tracking your everyday spending and saving for something special.
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