It’s impossible to turn on the radio or TV without hearing how bad the state of the economy is. It’s impossible to go into town without seeing the effects. And it’s impossible not to talk with friends or family and not hear how someone has been affected. Let’s face it, our economic world right now bites.
It’s during times like these that we all start to stress and panic a little. I know I do on a daily basis. So we do what we can to spend a little less and save a little more. But what do you do with that little extra that you save? Do you use it to pay medical bills so you don’t have to mess with this month’s budget? Do you put it on your credit cards? Your mortgage, car payments, or student loans? What about putting is aside into an emergency fund? Retirement? A fund for a house or your child’s future education? There’s so many different places that you can put that little extra you save, but which place is right? You only have so much extra to use, and to split it between all of them would be ridiculous and inconvenient. So, what do you do?
Situations like these send my mind right into auto-cycle, especially when I’m trying to fall asleep. Lucky enough for my poor overburdened mind, it wasn’t just a few days after hitting this road block that a savior came in the form of an information packet from my husband’s 401K providers, Charles Schwab. In a small brochure called “Where Should My Money Go First?” the financial professionals at Charles Schwab offer their take on how you should allocate your extra savings, and now, after reading it, I would like to share it with you!
What Schwab does is break your savings goals up into 8 savings goals:
1. Company Based 401K
2. Pay Off High-Interest-Rate Debt (credit cards)
3. Emergency Fund
4. Retirement Accounts
6. Home Down Payment
7. Pay Down High-Interest-Rate Debts (mortgages)
Then, they break these goals in half, telling us to start with the first four, completing them in order, then to move on to the last four, but arranging them in personal preference.
Okay. Great. So why? They offer some dry, but informative, information that I now convert into my own words so we can all make sense of it.
1.) Company Based 401K: First of all, this is only something you need to address if your company actually offers retirement plans. If they do, and you take advantage of it, make sure that you are a) opting to at least match the maximum contribution that your company will match, and b) contributing as much as you comfortably can. It makes sense, make sure you are getting the most FREE money you can from your company and all that you put in is done so before taxes are taken out so again, take advantage of it! (Disclaimer: I promise you’ll know what I’m saying if you have a 401K, even if you know next to nothing about it.)
2.) Pay Off High-Interest-Rate Debt (credit cards): Why? Because paying off debt makes it easier to save! Credit cards have really high interest rates, and the longer you go without paying off your balance, the more you end up paying in the end. So take what extra you have, and put it on them right away! Soon they’ll be paid off and that money you had to budget for your bill every month is now available for other things!
3.) Emergency Fund: We all need one in case of medical, job, or natural emergencies occur. Schwab recommends enough funds to cover at least three months of essential living expenses. WOW, three months? That’s a lot, and although it sounds like a lot, well, because it is, remember, every little bit helps. Even having one month’s worth of living expenses can help when the time comes. And think of it this way- take all that extra money you save from paying off your credit cards and put it here!
4.) Retirement Accounts: More about putting money aside for the future. This makes sense coming from an investing company, but of course, to many this isn’t a issue. Instead, what about thinking about your financial future in the form of more into your emergency savings, or maybe investments that will help you become more self sufficient further down the road (energy saving projects, off the grid ideas, food, etc.). Either way, always have your future in mind.
And that’s where your top four savings goals are first and foremost. Then, when those four have been addressed, move onto the last four and put them in your preferred order. I assume that I don’t have to go into detail why you might want to put money aside for a home, education, or work on your existing mortgage.
So, take it or leave it, here is one investing company’s recommendation for where to put your money. I personally am going to use it because it makes sense to me. Then, when the credit cards and medical bills are paid off (I’m even thinking about putting almost all of any tax rebate this year to them) I can take that $200 a month that usually goes towards them and put it into an emergency fund. Before long we’ll have quite the emergency fund, leaving us feeling a little more secure in this crazy market based world.