If you have money leftover after paying the bills, you may be asking yourself “Is it better to make an extra credit card payment or invest the cash for the future?” This is a difficult question to answer since everyone’s financial situation is unique. Ideally, you want to do both at the same time. Debt can be expensive but not having an emergency fund can be too.
How Much is Your Debt Costing You? List all your debts and the interest rate of each next to it. Paying off your high-interest rate (think double-digits) credit cards first is usually a good idea. For example, if you have an additional $100 and you use it to pay your credit card with a 15% interest rate, you’ll save $15 over the year. Mortgage and car loans usually have lower interest rates compared to credit cards. If your loans don’t, you might consider contacting the Credit Union about refinancing. Rates are still at historic lows.
Tip: Review your credit card statement to see how much it’s costing you – and how long it will take – if you’re just making the minimum payment.
Do You Have an Emergency Fund? Life happens – a broken hot water tank to unplanned medical expenses. Unfortunately, you should also consider job loss. If you don’t have an emergency fund, you may be facing more high-interest debt and even dipping into your retirement savings. Experts suggest that you have three to six months of living expenses in reserve. If this target is too high for you right now, try building a smaller reserve, $500 to $2000, to cover the average cost of an unplanned event. Remember to use the savings from paying down your high-interest rate credit cards to fund your rainy-day fund.
Tip: Set up an automatic transfer each month from your checking to an “emergency” savings account.
Are You Missing Out on “Free” Retirement Money? It may be difficult to save for retirement while you’re paying off your high-interest debt and building an emergency fund, so don’t turn down the chance for “free” money. If your company matches the money you put into to a retirement savings plan (for example, a 401(k), you should consider contributing the maximum percentage of your paycheck that the company will match. It’s “free” money.
Tip: If you receive a bonus or tax refund, put some of the money into your retirement savings.