Thursday, July 12th, 2018
A: Don't know where to start? These sorts of decisions always depend on someone's personal financial situation, but if you're wondering what to tackle first, here are my suggestions.
If you're eating into your savings or using credit to get by each month, a first step might be getting out of the red and into the black. There are really only two ways to do this: earn more, or spend less. Because most of us can't get a raise whenever we ask, the best place to start is by looking at your spending and seeing what you can cut. It isn't fun, but having a budget is probably the best thing you can do to understand your spending habits.
If you don't pay off your credit card(s) each month, and instead pay what you can, then that's priority number two. High-interest debt is a killer if you're trying to build your wealth and net worth, and so it's best to dig yourself out of that hole as quickly as you can. I know lots of people who simply decided credit cards weren't for them, so they use cash and debit. It's one way to live off what you literally have in your chequing account. And it works. If the money isn't there, you simply can't buy the thing.
Unanticipated expenses happen, and it hurts to dig into savings or to go into debt by using credit to pay for them. So it's crucial to your financial health to have an emergency fund with between 3 and 6 months worth of expenses in it. Emergency funds aren't just for unexpected life events like losing your job, they're also for costs like car or home repairs you weren't expecting. These things happen, so it's best to have a fund specifically dedicated to the unexpected. And when you do have to dip into your emergency fund, you'll want to prioritize getting it replenished.
This is kind of the main event. And it's the hardest one, for sure, because it's so far out in the distant future when we're young, and we have so many conflicting priorities vying with it for our attention during our working years. We all hear estimates from experts who say you need $2,500,000 to retire, but that feels so unattainable when we only have $40,000 saved. So why even try? Actually, we probably don't need that $2.5 million.
The above list of priorities doesn't have to be tackled one item at a time. Instead, set aside what you can toward them in priority. Having an emergency fund, for example, is probably more important to you than putting everything you have toward retirement. Assign a percentage of your monthly allocation to each goal until you start checking them off.
What's excluded from this list is the fact that we all want to go on holiday, buy new cars, etc. And so those things don't have a priority list. Those are self-selected, and need to fit into your overall plan once you've started working toward the essentials.
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