When it comes to repaying debt, always pay at least the minimum payment amounts, though preferably more to help pay it off quicker as well as to decrease the amount of interest you pay. In addition, any extra funds that can go towards debt, consider first paying the bad debt with the highest interest rate.
Saving money needs to become a habit! The next question that might arise is, where do you save first? 401k, savings account, 529 plans, etc. Here is a suggested priority list for your savings:
1) Participate in your employer’s retirement plan. – It is highly recommended to contribute at least as much as the employer will match. An employer’s match is like free money… who isn’t willing to receive that!
2) Create an emergency fund to cover at least 4-6 months of non-discretionary living expenses. These fund will pay for any urgent cash requirements or a few months of bills if your income is decreased or ends for a period of time. (Always remember to replenish it!)
3) Contribute to an individual retirement account (IRA). – If you are in a lower income tax bracket, consider contributing to a Roth IRA (contributions are with after tax dollars – withdrawals later in life are tax-exempt). If you are in a higher income tax bracket, consider contributing to a qualified retirement plan such as a Traditional IRA (you may deduct the amount of your contribution on your tax return within certain AGI limitations – withdrawals later in life are taxed).
4) Save for your children’s education. – There are various options to save for education, e.g., a Cloverdale or 529 account.
5) Save for a home, home improvements, vacations, or other items on your wish list. – These are recommended once you are saving for retirement and have eliminated any bad debt.
6) SAVE, SAVE, SAVE!
For short term savings, like your emergency fund, you should keep these funds in an account that you can easily access. For long term savings, keep these funds invested.
If this feels overwhelming, don’t let it be. There is not one right answer for everyone. First, start by analyzing and prioritizing debt obligations to decide which obligations to pay more than the minimum amount (think bad debt first!). Then, figure out how much is remaining after all non-discretionary living expenses are paid, this is the amount you have for savings. And yes, you are allowed to have some play money… life is too short to not enjoy it!
Please feel free to contact WealthPoint Advisors to discuss any questions you may have. We are always here to help!
