Hierarchy of Financial Needs
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1) Take Control of Your Finances
The first step: understand where your money is and where it goes. Once that becomes clear, create a budget. Analyze your expenses and how they match up as a percentage of your income. Are these expenses unavoidable? Try and find places where the spending is not worth what you get in return (whether that is measured by having a roof over your head or treating yourself to a fun night out). There are plenty of free resources out there to help you do this. Even looking through credit card purchase history on your phone is a great place to start.
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2) Create an Emergency Fund
Once you have an understanding of your expenses and income, begin to create an easily accessible and liquid reserve of cash - an “emergency fund.” The easiest way to do this is with an FDIC-Insured Savings or Checking account through a local or online bank. The account should have zero fees and low to non-existent minimum balance requirements. The size of an emergency fund will vary depending on your cost of living and source of income. Ideally, an emergency fund should have enough to cover approximately 3-6 months worth of living expenses (or closer to 12 if you have an unstable source of income).
3) Pay Down High Interest Debt
The worst offender is credit card debt. Many credit card companies charge 20%+ Annual Percentage Rates (APRs) on unpaid balances. If you have any credit card debt, make this your number one priority. You may want to consider paying down the balance by reducing your emergency fund to only account for the bare minimum expenses (e.g. repairs for a broken down car, an extra month's rent, etc.). Other high interest loans (perhaps 5% - 10% interest) should be the next focus. Lastly, low interest rate debt (2% - 5%), such as a mortgage, can be de-prioritized and stretched out over longer periods of time. Regardless of the interest rate, be sure to make at least the minimum payment on each loan in order to maintain a healthy credit score.
4) Save for Retirement
If your employer offers matching retirement account contributions, do your best to receive the full amount. Typically, large employers offer 50% of your first 6% of salary contributions (or something of similar value). This means that by contributing 6% of your salary to a 401(k), you will receive an additional 3% from your employer at no cost. This is free money; take it! If you are self-employed, there are a host of other options to help you receive similar tax-advantaged retirement savings. If you can afford it, contributing 15% or more of your annual income to a 401(k) and/or Individual Retirement Account (IRA) is often your best bet to save for retirement.
5) Save for Other Goals
Now that everything else is accounted for, begin to prioritize other savings opportunities. For instance, if you are insured by a High Deductible Health Plan (HDHP), you are likely eligible to open a Health Savings Account (HSA). This is a tax-advantaged fund that is meant to help assist with out-of-pocket medical expenses. You own your HSA, not your employer, so it will stay with you and accrue interest if you move to a different job or switch health plans. Then, if you plan on putting money away for 5-10+ years, but not necessarily until retirement, consider investing in low expense ratio Index Funds. Vanguard, Fidelity, and Schwab are large brokerage firms that have plenty of funds to choose from, and setting up an account is easy. Lastly, if your goals are short-term in nature, such as a down payment on a mortgage, FDIC-insured savings and checking accounts are your best bet.