Everyone worries about money, so when the new year rolls around you might make a resolution to save for retirement, set aside cash for a big purchase, pay off debt - or all of the above. And then life gets busy, and worries pile up, and you might lose sight of your resolution - especially if you don’t know where to start.
We get it. But here’s the thing – you don’t have to instantly change everything about how you manage your money in order to make some progress. If you prioritize one or two goals and start working at them, you can make a big difference, and the rest becomes more manageable.
How do you pick where to start? Well, we’ve got some ideas about that.
Should you pay off your debt or save up money?
Paying off your debt and building up your savings are both really important. So, how do you prioritize? If you only focus on paying off debt, you lose the opportunity to put your savings to work earning interest. If you only focus on saving money, your debt and interest payments keep growing, which isn’t helping you save, in the end. So the simplest way to keep your debt and your savings on track is to contribute to both.
That said, the kind of debt you have will impact how quickly you should pay it off.
Pay off credit card debt
If you owe money on credit cards with high interest rates, try to pay it off as soon as you can - even if it means you put less into savings for a bit. It’ll reduce the amount you owe and the amount of interest you’re paying. This can actually help you save a lot of money.
Low interest debt can wait, sometimes
If your debt is relatively low interest - maybe you have a really great line of credit or student loan, for example - it can make sense to build up some savings before working on your debt. A good guideline is to save enough for an emergency fund and then start making debt payments.
Yes, you really do need an emergency fund
Expect the unexpected. Health emergencies, car repairs, or losing your job can be even harder to deal with if you don’t have money set aside to help cover the added costs. Without emergency savings you might find yourself falling back on credit cards to cover expenses, which means - you guessed it - more debt.
The ideal emergency fund would cover three to six months of expenses. At the very least, it’s a good idea to set aside at least $1,000.
Save faster, automatically
If you want to save, but don’t want to worry about remembering to make regular contributions, we have the perfect solution: pre-authorized contributions (PAC). A PAC withdraws a set amount from one of your other accounts and adds it to your savings at predetermined times - like every month. You can start by contributing as little as $25 at a time.
Don’t delay long-term savings
It’s simple: if you start saving for big goals like retirement early on, your money has more time to earn interest and your savings grow more. It can feel odd to plan for big future goals if you still have debt, but delaying your retirement savings until all your debt is gone means that reaching your retirement goals will take more time and money later. So especially if you’re lucky enough to have low interest debt, start setting aside money for your future – even if it’s just a little at a time.
Talk to an advisor
We love that you read our blog, but we know it’s not a replacement for financial advice that’s completely personal to you and your money. We highly recommend talking to a Meridian advisor - they can help you create a detailed plan for managing your money.