If you’re looking for personal finance advice online, you could end up feeling more confused than before you began your search for answers. Should you save or invest? Build an emergency fund or pay off debt? It seems like every expert has a different opinion.
3 Financial Goals Examples and How to Prioritize
Instead of being confused about what to do, we’re going to break down the mystery and help you figure out what to focus on first. Here’s a guide to setting financial goals.
Financial Goal #1: Save an Emergency Fund
We’re here to settle the score: yes, you should have an emergency fund. And no, it shouldn’t be a mere $1,000.
An emergency fund can be your best tool for getting out of and staying out of debt. Let me explain: financial emergencies happen, and if you don’t have a solid emergency fund when one arises, you’ll be scrambling. You might be forced to put expenses on your credit card just to keep up with your bills.
Having a buffer of savings the only way you can break the cycle of debt for good.
Start by saving six months’ worth of expenses in an interest-bearing savings account. That might sound like a lot, especially if you are paying off debt. But this amount is a good safety net if your car breaks down, you lose your job, or you have a medical emergency.
Emergencies are not a ‘what if’ game — they are a certainty in life. Things happen. Maybe not today, tomorrow, or even this year. But unexpected things arise all the time and instead of getting deeper in debt, use your emergency fund when you really need it. You’ll be grateful you have it.
To help make saving easier, get a separate savings account and automate withdrawals from your paycheck.
Financial Goal #2: Ditch Debt
Here’s a sobering fact: When you’re in debt, your money is never truly yours. Your money belongs to your lender. Not to mention, you’re also losing money to interest charges.
If you’re in debt, focus on eliminating it as soon as possible. Here’s the order you should pay things off:
1. Credit card debt. Interest rates on credit cards can be downright outrageous — typically between 15%-20% APR. Focus on eliminating this high-interest debt first.
Start by going on a cash diet and not using your credit cards while you get a handle on this debt. Talk to your card issuer and see if you can negotiate a lower interest rate or look into a personal loan to consolidate your debt and save money on interest.
2. Car loan. If you have a car loan, you’ll want to get rid of this debt next. Since it’is a secured loan, meaning it’s backed by collateral (the car), your car could be repossessed if you fail to make payments.
3. Student loans. Educational debt can often be seen as “good debt,” but let’s not kid ourselves; It’s still debt.
First, start paying back your private student loans. Private student loans have less flexible repayment options and tend to have variable rates that could go up at any time. Then focus on your federal loans and pay off the highest interest loans first, such as Graduate PLUS loans. If you can afford it, pay more than the minimum and get those suckers gone.
4. Medical debt. If you have medical debt, call your service provider and see if you can come up with a repayment plan or apply for financial aid. It’s possible to get your bills lowered in some cases.
Focusing on one loan does not mean neglecting the other ones. This order is a guide to help you illustrate where the majority of your funds should be going, while continuing to pay at least the minimum on the rest.
Financial Goal #3: Maximize Your Investments
It can be hard to plan for the future and invest if you’re paying off debt now. But one thing is for sure: if you have an employer-sponsored 401k with a match, make sure you are taking advantage of that free money.
Many employers will match your contributions up to a certain percentage. By not taking advantage of this perk, you’re missing out on free money. Make sure you take advantage of your employer match and get that money that is rightfully yours.
If you choose, you can max out your retirement contributions and put $18,000 toward your 401k in 2015 and 2016. If you have money leftover after maxing out your 401k, consider opening a Roth or Traditional IRA as well, which have contribution limits of $5,500 per year ($6,500 if you’re over 50).
Managing multiple financial priorities can be tough — it feels like everything is vying for your dollars and it’s difficult to make the right decision for you and your finances. Using this outline as a guide, you can get your financial priorities straight, so you know what to focus on first.
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