People in the US seem to have some difficulties in saving for, well much of anything really. Very few people my age own their house outright, finance their automobile purchases, have high credit card debt due to periodic impulse purchases and many with large student loans to repay. So how can we save when we are programmed to spend and not think of the consequences? Well, the first thing you need to do is pay off your debts that you can and then start saving what you can. So where do you start you may ask? Let us start somewhere where we all need to be and that is at the beginning.
So where do you start when you have no savings and debts to pay? First, pay the minimums on your debts and then save at least a $1,000 for an emergency fund. Why a $1,000 you ask? It is a good start for an emergency fund and can cover many of the smaller variety emergencies that can arise from time to time. That is the first step that you need to take on the path to saving. Start a small but crucial emergency fund today.
Then you can move on to paying off your debts and really start the saving process as it is extremely difficult to save when you have outstanding debts to pay. Start with either the smallest debt or the one with the highest interest rate to pay first. The reasoning behind this is for some people they need the feeling of completion so they should start with the smallest debt to pay first then move to the next on the list. As you pay one debt, you add that payment to the payment of the next is thereby increasing the payments on that debt paying it off faster. You follow this process until all your debts are paid off. Some people call this the snowball method as your payment to each following debt increases by the previous debts already paid off. If you decide to start with the highest interest debt, then the process is still the same just in a different repayment order.
Then after you have reached this point and you have at least everything but maybe your mortgage and student loans paid off you are in a position to start some serious savings. Why do you not have to pay off those two debts you may ask? It is simple, they generally have low-interest rates and in many instances have tax benefits for some individuals. Also, these are debts that have some positive things associated with them such as the residence you live in and an education that hopefully got you a better paying job after college. Since these debts tend to have some of the lowest interest rates of any debts you should pay them off last, maybe even after you have established a fully funded emergency fund.
So what is a fully funded emergency fund look like? Some financial planners say anywhere from three but preferably six months worth of monthly expenses. Since you do not have any consumer debts anymore, the fund should be smaller than it would have been if you had done this exercise before paying them all off. Any debts you have left plus you living expenses would constitute your monthly expenses. These funds that have been saved need to be placed in an account that is liquid in nature and easy to access in the event of an actual emergency. Then after you have your emergency fund established, you can start saving money for other things such as automobiles and vacations.
The goal is saving for any eventual future purchases that you may have. The goal is to pay off your expensive and costly debts and then have enough saved for any eventual emergency that might arise. And after that, you will be able to save for the purchases that you will be making in the future without relying on banks or credit cards to purchase. It is everyone’s dream to be able to do this, and it is possible if you decide that is what you want to do and develop a plan to make it happen. Then and only then will you be able to make it happen. It takes discipline, and hard work but thousands of people make this dream a reality and success.
Of course despite any of this if you are employed and your company has a 401(k) that offers a company match always take advantage of that as it is free money that will go towards your retirement. And that is the ultimate goal of paying off debts and savings, and that is creating a large retirement fund that will allow you to live your golden years in luxury. And in the process live life to its fullest and enjoy paying yourself first and not the financial institutions that control us now by the means of debts.
If you need help creating or developing a plan to tackle your debts feel free to contact me directly or leave a message on the post if you wish to have an open discussion.
