Should you pay off debt, or save for a rainy day? Knock out some of your HECS debt, or put some extra money toward your credit card debt? Focus on your savings account, or save for retirement?
There’s no ‘right’ way to get your financial house in order. Your priorities differ from mine, and my financial reality is different than yours. But with that in mind, there is a general financial path that makes sense for many people to follow, which you can tweak as needed.
Here’s the order I’d prioritise:
Your essentials are the expenses that are non-negotiable. Your rent, food, transportation, HECS, health insurance, minimum credit card payment, cell phone, etc. All of these need to be paid off before you can even think about working on some other goals.
Ideally, your emergency fund will house a few months’ worth of expenses. But if you’re just getting started — or recovering from a setback — focus on saving at least a thousand. It’s substantive amount that should be able to cover whatever incident or emergency that arises.
The exact number here is flexible. If you’re more comfortable with $1,500 or $2,000 or even $4,000 , then focus instead on that. Again, these are your priorities. But $1,000 is a good start when you’re juggling multiple money goals and have limited funds (aka, you’re one of the 99 per cent).
Invest for Retirement
Once you have the essentials covered and you’ve socked away a sum you’re comfortable with in an easily accessible rainy day fund, your next priority is your retirement account. While most of us have a super account somewhere, having an account purely for saving towards that big day when you retire is always good idea.
Tackle High Interest Debt
Once you have a little bit saved and a little bit going toward your retirement each month, you can accelerate your debt payments. Remember, you should be paying at least the minimum amount due each month no matter what, to remain in good standing with your bank or creditor.
This is the part that might not seem intuitive. Why work off your debt when you only have a tiny amount in your emergency fund? It’s a good question, and if you’re more comfortable saving more first, then go for it. But I’d think about it like this: High interest debt is, obviously, costing you even more money every day it sits unpaid. In that way, it is an emergency, so it makes sense to use money you’d save to pay it off.
If something happens, then you could put it back on the card and start again, but at least you’re working on saving on those debt costs. That means pay off your credit card before your HECS debt, if you have both. If you have multiple cards, focus on the one with the highest debt first and tackle it head on.
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You might not be able to put your rent, for example, on a credit card if something happens. That’s why it’s important to have your essentials covered first (and if your rent is more than $1,000 per month as some Sydney siders have, then put at least one month away). But as long as you have a solid $1,000 or so base, work paying off any debt you have to save more in the long run.
“If your credit card interest rate is at 15 per cent [or higher], then funnel as much of your cash flow as possible into getting it paid off pronto,” Greg McBride, chief financial analyst at Bankrate, told me earlier in the year. “This is a risk-free 15 per cent return.”
Add to Your Emergency Fund
Once you’ve paid down your debt, either completely or by using a sustainable repayment plan, divert some of those payments or any extra funds you have to your emergency fund. Build up to that four to six months of expenses every expert recommends putting away.
Once you’ve paid off your debt (or, again, have that sustainable plan in place) and built up your emergency fund, it’s time to invest more if you can. That can be for retirement, in a taxable account for a shorter-term goal, or delve into the world of stocks.
This is just an outline to start getting your money in order, or recover from a setback. It doesn’t take into account goals like saving for a house, or for kids, but it’s a good place to start if you’re unsure how to prioritise your many financial to-dos.
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