Quick: think of something more exciting than sorting through your personal finances.
Not a difficult task, is it?
Chances are the prospect of prioritizing your finances doesn’t quite match up to relaxing on the beach. If you’ve got goals for your future (like, you know, relaxing on the beach) you’ll need to get your financial house in order. Oftentimes the biggest hurdle is taking the first step.
How Do I Know Where to Start?
If you search online for “prioritizing finances,” you’ll get thousands of articles about what you “must” do. How do you sort through it all, when EVERYTHING feels like a priority? You likely have to consider credit card debt, car loans, student loan debt, mortgage payments and 401(k) contributions among other necessities, like health care expenses. Plus, you’d like to have money for emergencies as well as recreation. And what about helping your kids pay for college and retiring when you can still enjoy retirement life?
“The starting point is understanding your expenses in relation to your cash flow,” writes Kevin Gahagan of Mosaic Financial Partners, Inc. “Once you understand what portion of your income must go to the non-negotiable, ongoing expenses of living (housing, transportation, food, utilities, etc.) you can begin to prioritize the balance of your financial resources.”
Determining what’s non-negotiable is important. Set aside what you need for your necessities first, and then look at your wants. Organizing your budget is a great first step. It can seem overwhelming, but many financial websites and tools are available to simplify the process.
Once you’ve figured out where your money is going and you have the basics covered, it’s time to put the rest of your money where you can get the most bang for your buck.
Pay yourself first.
This is the sage advice you’ll hear again and again from financial experts. According to Robert R. Johnson, president and CEO of The American College of Financial Services, retirement needs to be your number-one priority.
“Being cash strapped in retirement is truly many Americans’ biggest financial regret,” says Johnson. “The stark truth is that if a person gets to retirement and hasn’t accumulated enough money, they only have two options: 1) work longer, or 2) reduce standard of living in retirement. And, unfortunately, the first option is often not available for the many people who have to retire for health reasons – their own health or to be a caretaker for a spouse or significant other.”
While it’s great that people are living longer than their great-grandparents, there’s a catch: the money it takes to live. “Surveys show that many retirees and people near retirement are more fearful of outliving their retirement savings than death itself,” Johnson confirms.
Of course, it’s normal to worry about the future of your children, and the instinct to put them first makes sense, but Johnson argues, “If you have not saved for your kid’s education and it is time for him to go to college, there are options. The student can take out loans, work part-time, receive scholarships or grants, go to less expensive state schools or community colleges or attend college part-time. Not having enough money to retire is devastating to individuals.”
How much of your income should go into your retirement savings? It depends on your age and your retirement goals, but experts generally recommend at least 10% of your monthly income go toward retirement. Make sure you’re taking full advantage of your workplace’s 401(k) match, if available.
Now that you’ve “paid yourself,” it’s time to explore emergency funds. Brandon Hayes of oXYGen Financial thinks few things are more important than a proper emergency fund. This emergency fund should come before almost everything, even paying down your debt. Why?
“Even clients who have debt should have some amount of emergency reserves,” he writes. “Otherwise, if you pay every penny toward your debt and an emergency arises, then you end up in debt right back where you started.”
What should your emergency fund look like? Follow Hayes’ rules of thumb:
- Families who have two working spouses who contribute to the family finances should look to have three months of TOTAL expenses of cash reserves on hand
- Self-employed individuals should try and accumulate 12–18 months of total expenses
- For a single parent or sole income provider, look to have 6 months of expenses in liquid reserves or short-term savings vehicles
Those numbers can be intimidating. If you have to, start slow. Many employers can directly deposit a portion of your paycheck into your savings account, so you never even notice that it’s missing. If you’re tech-savvy, try an app like Digit or Acorns that links to your checking account and transfers small amounts of money into your savings account.
Pay Down Debt
Now you’re ready to push up your sleeves and tackle that high-interest credit card debt. There are several popular strategies to pay down your debt, like the Snowball method and the Avalanche method. Research both topics and see what works best for you.
Ultimately what you do is up to you and your individual needs. Don’t let the work ahead intimidate you. Getting your finances in order will pay off for the rest of your life – literally.
What financial strategies do you recommend? Let me know in the comments below.
*Source’s opinions are not necessarily reflective of Quicken Loans.
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