Everyone wants you to do everything it seems: invest in the market, pay down all your debts, save up for your house, make sure your kids have money for college, etc. It can be overwhelming, I know. I had a hard time figuring out where to begin a couple of years ago.
Fortunately I learned that personal finance is not impossible to handle, it just has to be done with plan. My personal preference is one that is easy to follow and can be automated. I wanted to cover a couple of financial goals that you should have down before you move on to bigger and more complicated financial topics.
First Focus: Have One Month’s of Expenses Covered
I really have to stress that I believe this should be the first step of whatever financial plan you create. If you don’t have enough money to cover your bills for one month, you are financially vulnerable.
Next Goal: Pay off High Interest Debt Quickly
Having high interest debt while trying to invest can be a losing proposition. Credit card interest rates can be around 21% (or higher for college credit cards), which is much higher than the historical stock market index return rate. You may want to redirect all your retirement contributions (possible exception – meeting your employer’s match) to your debt reduction fund.
Once you’re out of high interest debt, you can put your money back towards investing for retirement. Here’s what I did to create a system to pay off my credit cards.
Organized all my bills and found out the balance on all your credit cards.
It was surprising, but I had to know what I needed to do get myself back in the black. Avoiding your bills can hurt your score and set you back even further. Many credit card companies charge fee for being over the limit and being late. The good news is that you can use budget tools like Quicken or Mint to quickly see your true financial picture.
Developed a debt snowball plan.
I created a spreadsheet and listed all my debts along with their interest rates. I focused on attacking the highest interest rate first and continued my bigger payments in descending order until it was down. I also talked with my credit cards’ customer service representatives to get them to reduce my interest rate for a bit. It allowed me to pay my debts just a little bit faster.
What’s Next?
If you follow Dave Ramsey’s Baby Steps, you’re supposed to build your emergency fund up to 3-6 months worth of expenses. Some may argue that compound interest favors you to invest now as part of your retirement plan.
Why can’t you accomplish both by putting 80% or so towards savings and invest the rest? That way, you’re contributing some serious money for your retirement while still building up a financial cushion. Or you can reverse it and be more aggressive with your emergency fund.
Do What Works
It really boils down as to what works for you to get your finances in control. My only recommendation is having at least a one month cushion tucked away. How about you? What’s your biggest financial goal for 2010?
