The following contribution comes to us from Dave Chen.
How to Prioritize Your Finances
Your finances are a crucial part of your life. Without them, you would not have a place to live, you would not be able to afford to drive your vehicle, and so on. Your finances need to be properly managed to ensure that you do not wind up in a huge debt hole without a way to climb out. Below, we will provide you with some tips and steps to prioritize your finances.
Of course, you want to make sure that you ALWAYS pay your obligations first because you need a place to live, and sacrificing this to put money into your savings account does not make much sense. Okay, let’s take a look at the tips now.
1. Pay Off High-interest Debt
The first priority is for you to pay down your highest interest debt and also any dangerous debt that you may have. You need to tackle these first because they will hurt you and stick with you if you do not. Many people do not know what debts to consider as dangerous debt. These debts include those with high interest rates, tax liens, debts in collection, and so on.
Pay-day loans, credit cards, high-interest car loans, and high-interest personal loans need to be paid off immediately. The longer you wait to pay them off, the worse off you will be. You will accumulate interest on this debt at a rapid rate, and the sooner you pay it off, the better – you will save thousands.
2. Save For Retirement
You want to retire at some point, right? If so, you need to think about your future and start to save for retirement. The longer you wait, the more money you will need to put away. For example, if you do not start saving for retirement until you are 40, you may have to put away half of your salary to be able to have a nice nest egg when you retire.
Your retirement account will ultimately determine whether or not you will live in poverty when you retire. The less you save, the more government help you will need, and the longer you will have to work.
To help you determine how much money you should save, if you were to save $500 per month for a period of 20 years and earn 10 percent on the money, you would save about $380,000 for retirement.
3. Create an Emergency Fund
What would you do right now if the roof on your home caved in? What about if your vehicle’s engine blew? These are things that you need to think about and consider. Many people do not have any type of emergency fund set up, and this means that they have to forgo some of the things they need because of it.
An emergency fund will cover three to six months of all of your living expenses in case the worst situation ever happens. For many people, this means more than $10,000. You should start putting extra money into this account and leave it there. Even if you save one or two percent of your income yearly, you could easily reach a target of $500 per year or so.
4. Go Over Your Expenses
If you already live paycheck to paycheck, the only way that you will be able to have room to save would be to sit down and think about your expenses and then look at them from an unbiased view. If you have a cable bill at $200 and your car insurance is another $200, you may want to cut back on the cable and talk to your agent about a better rate.
You need to explore areas where you may be paying too much and then try to lower the cost. In addition, you should eliminate any expenses that you do not need. On top of this, there are ways to make extra money that can help handle these extra expenses.
Start to Prioritize Your Finances Today
If you are ready to get your financial future into focus, now is the time to do it. We have helped you above by letting you know what we think you need to prioritize first when it comes to your finances. You should focus on the highest interest loans you have because these loans can throw you into a crazy whirlwind of debt, especially if you only make the minimum monthly payments each month. Quite often, this may be private student loans taken out to pay for college. Even more often, these rates can be much higher than federal options.
From there, you should then focus on your retirement, your savings account, and setting goals for yourself. Now is the time for you get a head start and get on the right financial track by starting to prioritize your finances.
— Dave Chen is young professional working in the engineering field. On the side, he skiing, hiking, and writing about all things personal finance at MillenialPersonalFinance.com.