How To Get Your Finances In Order

Image: Estée Janssens on Unsplash

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:

Basics

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.

Save $1,000

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.

What 20-Somethings Need To Know About Getting Their Financial Lives In Order

A new class of college graduates means millions of young people are entering the workforce for the first time. But between building your emergency fund, paying off student loan debt and investing for the first time, there's still a lot more to learn. So what do you prioritise? That's what we're tackling this week.

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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.

Invest More

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.


Comments

    Don't forget discretionary spending along the way. Rewarding yourself, even in small ways, makes the sacrifices you feel you're making easier to accept. And after a while you wont think of them as sacrifices.

    Those rewards don't have to be big either. A bottle of booze, a movie night, even just a meal from somewhere different. Something to reward yourself for getting to next payday.

      It helps to detach rewards from having to spend money, spending money won't necessarily make you happier, so don't attach all your rewards to spending money, or it may just increase your cravings for spending resulting in blowouts.

        Fair point. Its more though that these sorts of articles are all about building wealth, and rarely cover building satisfaction. Its all well and good to build for the future, and we all need to do that, but if you don't stop to smell the roses along the way, you'll miss out during the best years of your life.

        Not doing so builds stress, which is never good. So reward yourself. You've earned it.

        I just found that having a somewhat set amount each pay to reward myself (I settled on $50) meant I wasn't splurging on lots of crap. I still went out and had fun, but it helped focus more on budgeting and in the end I simply stopped wasting as much as I was.

        And my personal financial position tells me I've been doing something right for a good while. I'm convinced that small amount played a significant part in that. Maybe not the biggest part, but still relevant.

          Sounds like it's working for you, the amount is key too, for some people, they think a few hundred, or a thousand is an appropriate amount. By decoupling happiness/reward to finances, you work out what the right amount is for you. You also don't feel deprived because you are happier.

          Your money or your life by Vicki Robinson is a great book on the subject and examining the coupling of money and happiness.

    One Book is required - The Total Money Makeover by Dave Ramsey - I'm on my way to becoming a millionaire

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