You Don’t Need to Be Rich to Have a Savings Plan
Thousands of books have been written on financial planning, and no single author’s advice is best for everyone. However, here are some common sense priorities that most financial planners would agree upon:
- Establish a cash emergency fund that is safe and easily accessible. It’s that you save the equivalent of three to six months’ pay.
- If your employer offers a 401K matching plan, contribute enough to “max out” the employer’s matching contribution. Don’t walk away from this “free money.”
- Pay off your existing credit card balances starting with the cards that charge the highest interest rates. In the future, pay off the entire credit card balance each month or use a debit card instead.
Before the recession, the conventional wisdom would have been to address the 401K match first because the return is higher than any credit card fees. The second priority would have been to pay down the credit cards. The logic here was that you could always fall back on the credit cards if you had an emergency and no emergency fund.
However, in today’s economy, many experts now stress building an emergency fund first, even at the expense of the high returns from the other two. Credit card companies are cutting back on credit card limits or credit availability altogether, so you could be caught without a safety net if you don’t make the emergency fund the highest priority.
At the end of the day, the best choice will probably depend on your specific situation. Consider both your short-term and long-term needs carefully, and make the best plan for your future.
Once you’ve accomplished the three recommendations above, consider making other investments for college, a home, retirement, etc. Be sure to select investments that are compatible with your particular savings goals and tolerance for risk. Investments for near term requirements will usually be more conservative than those further out.
You may want to seek professional help in making these decisions. If you would like to do some research on your own, here are some helpful links:
Top 10 Most Popular Personal Finance Websites