You may be asking yourself, “Now that I have money, what should I be doing?”. We have created Your Money Journey to answer this and help track your financial progress throughout life. In this article, we will discuss progressing to Mile 3. This grouping captures the beginning of your journey before diving into maximizing your investments.
Trailhead – Base Reserves
At the beginning of Your Money Journey, you will focus on building your base reserves. This can be viewed as an “initial” emergency fund. The focus is to save enough money to cover your medical deductibles or have a minimum of $1,000. This fund can help cover your healthcare risks and smaller, unexpected expenses. Keep in mind, you should avoid using a credit card to cover these emergencies.
Mile 1 – Utilizing Employer Match
While there is no such thing as a “free lunch,” this is as close as it gets. Many companies offer a match up to a certain percentage in employer-sponsored retirement accounts. Maximizing your contributions to attain the full match is a great starting point when it comes to saving for retirement. Failing to take advantage of this perk means leaving “free money” on the table.
Mile 2 – Fully Funded Emergency Account
This milestone is a continuation from the trailhead mentioned above. The best practice is to have 3-6 months of non-discretionary expenses in cash reserves. Examples of these expenses are mortgage/rent, loan payments, taxes, utilities and food. If you’re in a dual income household, three months of expenses saved may be sufficient. If you only have one income source, six months may be better. The primary use for your emergency fund is to cover job loss, car repair, home fixes and other similar expenses. If you are interested in learning more about emergency funds, click here.
Mile 3 – Pay Off High-Interest Debt
“High” interest is debatable, but we define any rate above the prevailing mortgage rate as “high”. You will typically see credit cards and consumer or student loans have “high” rates. Remember, debt (typically) does not go away. Paying the minimum can cause these types of debt to spiral out of control. If you are interested in learning more about debt management, click here.
Completing these milestones creates a powerful foundation for your financial plan. Choosing to ignore them can lead to unwanted consequences and ultimately lower your chances for a successful future.
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