How To Prioritize Your Money Needs
Most of us can’t tackle all of our spending and saving needs at once. We’re taught to maximize our retirement savings, create an emergency fund, pay off debts, and buy the right insurance while paying our bills, raising our kids, and trying to have a little bit of fun for ourselves. Here’s what you need to know now to properly prioritize your spending and manage your money.
Pay Your Bills
If you can get a handle on your basic living expenses, your ability to manage all your other financial priorities will be greatly enhanced. Try to limit your necessary expenses, which includes shelter, utilities, transportation, food, insurance, child care, and minimum loan payments, to less than 50% of your after-tax income. If your necessary expenses are higher than this, you may want to consider trimming your costs by trimming your food bills, lowering your home’s thermostat, finding a cheaper place to live, or getting rid of an expensive car.
Create An Emergency Fund
Having an emergency fund allows you to pay for minor emergencies without adding to your credit card debt. Set up automatic transfers from your checking account into a savings account and deposit any tax refunds or other windfall payments into the savings account until you have saved at least three months worth of expenses. There’s a large psychological advantage to having an emergency fund as people that have them are much less worried that a small financial emergency would cause a financial hardship.
Pay Off Credit Card Debt
Credit card debt is one of the most dangerous types of debt because lenders can change rates and terms at any time, the interest rate is usually in the double digits, and high credit limits encourage you to rack up more debt than you can comfortably repay. To eliminate this debt, target the debt with the highest interest rate first, paying as much as possible while paying the minimums on any other debts you may have. Another method would be to tackle your smallest debt first to give yourself the psychological boost of completely paying off a credit card bill.
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