Do you ever find yourself wondering what you should be doing to manage your finances? What’s the right next step? What should you focus on first?
Well, you’re not alone. This is a regular conversation I have with people. To help, I’ve created this step-by-step guide to help you get things in order and see what you should focus on next.
STEP ONE: Do you have at least $1,000 in savings to cover emergency expenses?
Got it: Great. You can use that money to cover unexpected medical, auto, or home costs that come up. Go to STEP 2.
Not there: Now is the perfect time to create a monthly spending plan via paper/excel or maybe even an app if you haven’t already. Look for ways to cut back on things killing the budget and find ways to improve how you manage your spending. If you need help paying bills or covering the basics, check out these ideas.
STEP TWO: Are you saving enough in your 401(k) to get 100% of your employer’s match?
I’m getting the match: Perfect. You’re getting “free money” and tax benefits at the same time. Move on to STEP 3.
- For guidance on how to invest the money you’re contributing in your 401(k), go here.
I’m not: Increase your contribution to at least get the match. If money is tight, consider bumping up your contribution just 1% or more per year until you hit what’s needed to get the match
- Your 401k might have an auto-escalator tool, which let’s you set a schedule of automatic increases – set it up for the same time you get your annual raise and you won’t even notice the difference.
STEP THREE: Do you have any high interest rate debt? (greater than 4%?)
I don’t: Great. Move to STEP 4. Just remember that not all debt is created equal. Interest you pay on student loans and mortgage debt may be tax deductible. However, try to keep these total payments under 25% of your monthly income.
I do: You finished STEP 2 above, so you already made sure you’re contributing enough to get the match from your employer in your 401(k). Now it’s time to make a plan to eliminate that debt. You can choose to pay off your debt starting with the lowest balance first OR starting with the debt with the highest interest rate.
STEP FOUR: Do you have enough savings to cover 3-6 months of necessary expenses?
Yes. Got it under control: Nice. On to STEP 5. This also helps in the event you find yourself looking for work. (It typically takes 1 month to find a job for every $10,000 you make.)
Not yet: Pay yourself first.You can set up an automatic transfer from your paycheck into a separate savings account until you’ve built up enough savings. Here’s how to start or boost your emergency fund.
STEP FIVE: Are you on track to replace at least 80% of your income in retirement?
Yes, I’m on track: Congrats. Expenses tend to drop in retirement, but make sure to run a projection yearly to stay on track.
- Not sure how you much you’ll need for retirement? The sources of income you’ll have in retirement, what your likely retirement expenses will be, how much of a gap there is (if any), and how long you might spend in retirement all come into play. Go here to find your retirement number.
- Have a Health Savings Account (HSA)? Check this out first.
Not yet: Use the Retirement Calculator to see where you stand and try to increase contributions as needed.
- Remember, just like in STEP 2, consider bumping your contribution up just 1% or more per year until you hit the percentage you need to contribute to get on track for retirement.
Figure out where you are on this guide and start working on your finances from there. I heard someone quote an author once stating that instead of trying harder, we should “try softer” to make one simple change or focus on one step at a time. Some of the best advice ever.