We’ve all heard the warnings. One survey says you need to save more for retirement. Another urges you to pay off your student loans. A third reveals household debt is at an all-time high.
You want to be smart with your finances, but you also have lots of responsibilities. When it comes to saving and spending, which priority should you tackle first?
While everyone’s finances look different, there’s a strategic way to distribute your money. If you’ve ever wondered, “Where should I put my money?” read on for a step-by-step guide.
1. Cover your basic living expenses
First and foremost, you need to set aside part of your paycheck to cover basic living expenses. Providing for your needs comes before anything else.
“Ever heard the words ‘pay yourself first’?” said Bola Sokunbi of Clever Girl Finance. “This should be a consistent part of any plan you make.”
If you’re not already, track your living expenses on a spreadsheet or use a budget-tracking app such as Mint. If you’re living beyond your means, think about ways to reduce costs, such as moving to a cheaper apartment.
And if you’re living paycheck to paycheck, consider setting up additional sources of income with a part-time job or side hustle. The best place to put money is back into your own hands.
2. Build a 3- to 6-month emergency fund
Your next priority is building an emergency fund. You never know when an unexpected expense could come up. With an emergency fund, you’ll be able to cover sudden costs like car repairs or a medical emergency.
“A portion of your earnings should be diverted into your emergency savings accounts for a rainy day,” said Sokunbi. “You can rely on your emergency savings instead of a credit card or other debt.”
Some finance experts suggest a three- to six-month emergency fund. In other words, you’d have enough to get by for three to six months if you lost your job.
Where’s the safest place to put money? Consider a high-yield savings account. That way, you can access funds immediately if you have a problem. But since most savings accounts have withdrawal limits, you’ll think twice about touching your savings unless it’s absolutely necessary.
3. Pay down high-interest debt
High-interest debt should be your next priority. According to the Federal Reserve Bank of New York, many of us are no strangers to debt. Altogether, Americans owe $12.7 trillion in personal loans, auto loans, credit card debt, student loans, and mortgages.
If you have a piece of that $12.7 trillion debt, make sure to keep up with your payments. “High-interest debt should always be [a] priority,” said Brian Davis, a real estate and personal finance blogger at Spark Rental. “Often that means credit card debt, which can have interest rates in the 18% to 24% range.”
In fact, Davis recommends prioritizing any debt with an interest rate of 7% or higher. But when it comes to low-interest debt, you may again wonder, “Where should I put my money?” Should you save for retirement or pay off your loans as fast as possible?
At this point, Davis said it becomes a judgment call. “The most conservative move is to continue paying off debt. [But] I would urge consumers to consider a more nuanced approach,” he said.
For example, you may choose to invest extra money rather than pay off debt early. Let’s say your investment has a 7 percent return, and your loans have an interest rate of 3%. By investing your extra cash, you could make more money in the long run.
That being said, you must continue to make at least the minimum payments on your loans to avoid default.
4. Take full advantage of a 401(k) employer match
Some employers offer a 401(k) matching benefit to their workers. If you contribute money to a 401(k), your employer will match it up to a certain percentage of your salary.
Let’s say you make $60,000 a year. If your company offers a 3 percent match, it will contribute up to $1,800 to your 401(k). If you invest that amount, your employer will immediately double it.
“If your employer offers a 401(k) with a company match, you should take advantage of it,” advised Vic Patel, founder of Forex Trading Group. “Contribute [at least] enough to earn the full matching contribution.”
An employer-matched 401(k) is one of the best places to put money. Nowhere else will you see a 100 percent rate of return on your investment. So if you can swing it, max out this matching benefit. Don’t turn your back on free money.
5. Contribute money to an IRA
Even if you do have a 401(k), it could make sense to contribute to an IRA, as well. Some IRAs have certain tax advantages over 401(k)s.
If your company offers a 401(k), speak with human resources to learn the details of the account. Then, you can decide whether you want to save money in a 401(k), an IRA, or both.
6. Save for your other goals
If you’ve taken care of your debts and retirement savings, congratulations! The hard part is over. Set up an automatic deposit into those accounts and you can forget about your savings while they quietly compound interest.
At this point, you’re free to save for other, more immediate goals. Maybe you want to buy a house or travel to Hawaii. Perhaps you’re putting aside money to plan a wedding or put your kids through college.
Whatever your goals, you’ll be in good financial shape to achieve them. You can feel confident about how you’re distributing your paycheck, one step at a time.
If you’re starting from scratch, check out this beginner’s guide to budgeting money.
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