Getting started as an investor may seem daunting when just starting out after college with student loan debt and bills piling up. There can be a tug-of-war between saving for short-term emergencies versus repaying student loan debt versus paying your monthly bills and credit card balances. All this occurs while being pressured to start saving for retirement that seems like light years away. So, where should you start?
Build Emergency Fund. The first place to start is setting up an emergency fund with enough cash to cover at least one month worth of living expenses. The emergency fund is intended to help you pay for what you have not budgeted, like expenses not covered from a car accident or lost income in between jobs. After you complete the next three steps, begin working towards having enough emergency savings to cover 3-6 months worth of expenses.
Don’t Carry Credit Card Balances. Pay off any consumer debt each month and if you are carrying old balances, pay them off as soon as possible. It does not make sense to accumulate cash in an emergency fund that earns no or very low interest while paying high interest expense on credit card debt. This step is essential and should always be priority number one. If you find it difficult to complete this step, it is a sign you are spending more than you make and you need to cut back on your spending.
Leverage Free Money. If your employer matches your contributions to a 401(k), contribute at least up to the amount matched by your employer. Increase your contributions later when you get a raise or free up cash flow from paying off student loan debt. Until you have more clarity on your retirement goals, target saving between 10% to 20% of your gross income.
Double Down on Debt. Just because your debt has a set monthly payment amount, it does not mean you cannot pay more. Take whatever extra cash flow and put it towards getting rid of your student loans or credit card debt. Even small and regular extra payments can add up to huge savings over time!
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