Money Girl gives you a step-by-step blueprint to prioritize your personal finances. Use these 5 financial priorities to help set goals, leverage your resources, and build wealth as quickly as possible.
Financial Priority #2: Pay dangerous debts
After setting your retirement savings in motion, your next financial priority is to tackle what I call dangerous debts. If you have debts like tax liens, any that you’re paying late, or have debt in collections, you need to get caught up as quickly as possible.
Dangerous debts also include high-interest credit accounts—such as payday loans, credit cards, and car loans—with rates in the double digits. These accounts can destroy your financial health because they drain your resources and keep you from using your money to save or invest instead.
But don’t worry yet about paying off low-interest debts, like mortgages or student loans, ahead of schedule because they’re relatively inexpensive. In addition, they come with built-in tax deductions, which further reduces their cost on an after-tax basis.
Financial Priority #3: Build an emergency fund
Once your retirement savings is on autopilot and you’re taking care of any dangerous debt, your next financial priority is to create a safety net known as an emergency fund.
Having emergency money is so important because it keeps you from going into debt in the first place. It’s what will keep you safe if you have a large unexpected expense or hit a financial rough patch, like losing your job or business income.
How much emergency savings you should have is different for everyone. If you work in an unstable industry or are the sole breadwinner for a large family, you probably need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.
Ideally, you should accumulate at least 3 to 6 months’ worth of your living expenses. Another good rule of thumb is to accumulate at least 10% of your annual gross income. For instance, if you earn $50,000, make a goal to accumulate and maintain a $5,000 emergency fund.
If you’re starting with zero savings, you could begin with a small goal, such as saving 1% or 2% of your income each year. Or you could start with a small target like $500 or $1,000 and increase it each year until you have a healthy amount of emergency money.
An important part of having emergency money is keeping is completely safe, which is why you should never invest it. Instead, keep it tucked away in a high-yield, FDIC-insured savings account so it’ll be there the moment you need it.
Financial Priority #4: Have the right insurance
In addition to having an emergency fund, an important part of taking control of your finances is being adequately insured. Many people get into debt in the first place because they don’t have enough of the right kinds of insurance—or they don’t have any insurance at all.
As your career progresses and your net worth increases, you’ll have more income and assets to protect from unexpected events. Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.
Make sure you have enough coverage to protect yourself and those you love from something unexpected jeopardizing your financial security and happiness. For starters, review your auto and home or renters insurance coverage. And by the way, if you rent and don’t have renters insurance, you need to get it today. It’s a bargain for the protections you get; it only costs $185 per year on average.
Many times having just the minimum amount of liability on these policies isn’t enough to protect you from a potential lawsuit. Consider adding an inexpensive umbrella liability policy for much more protection.
The Affordable Care Act, known as Obamacare, makes it mandatory to have health insurance. But that won’t pay your bills if you get sick or injured and can’t work. Disability coverage will replace a portion of your lost income if that happens.
And if you have family who would be hurt financially if you died, you need life insurance to protect them. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple hundred dollars per year. You can get free quotes for many different types of insurance using a site like insuranceQuotes.com.