Preface: Before we get started and to clarify, when In the Life of Zen writes about paying off debt, we are usually referring to bad debt which includes credit cards, car loans, student loans, medical debt, personal loans, etc. Mortgages are usually excluded from this list, unless otherwise stated.
Did you recently pay off your bad debt and now aren’t sure of what to do? Well, first and foremost CONGRATULATIONS! Well done you! This is a huge accomplishment and something to be celebrated. In fact, that is the first thing you should do. Paying off debt is no easy task and deserves to be applauded. Take this time to treat yourself to a nice meal or to something you’ve wanted for a long time, i.e. a new pair of jeans or shoes, etc. Just make sure you pay for it in cash (debit cards are okay!).
Now that you’ve paid off the bad debt you should focus on creating financial stability and finding ways to save and make more money, including:
Create an Emergency Fund
Create an emergency savings account of $1,000. Do not tap into this money for anything other than emergencies, i.e. flat tire, unexpected medical bill, home appliance repairs, etc. If you deplete funds throughout the year, make sure to add funds back in as money becomes available. The goal should be to always have $1,000 at your disposable for emergencies.
Increase Your 401k Contributions
If you are only contributing a small percentage of your paycheck to your 401k, make sure to increase your monthly contribution. Your goal should be to contribute the maximum amount allowed by the federal government each year. In 2020, the 401K yearly contribution limit is $19,500. If contributing $1,625 each month for 12 months is not doable, can you do $1,000 each month? If not, contribute as much as possible. Additionally, check with your employer to confirm if they match your contributions. If your employer matches 100% of your contributions up to $5,000 you should at the very least contribute $5,000 which means, you’ll get an extra $5,000 for free! This free money does not count towards the maximum limit set by the federal government. For example, if you contribute the maximum limit of $19,500, your employer can match/contribute an additional $37,500 for a combined limit of $57,000 in 2020.
Save 3-6 Months of Living Expenses
For a financial peace of mind, there’s nothing better than having 3-6 months of living expenses tucked away in a savings account. If your total monthly bills equal $5,000 your goal should be to have a savings account with anywhere from $15,000-$30,000. When opening a savings account, consider opening a personal savings accounts with a credible online bank that offer accounts with no minimum balance, no maintenance fees, and an annual percentage yield (APY) of at least 1%. Each month automatically contribute money from each paycheck to your 3-6-month fund. This is also a great place to deposit those year-end bonuses, monetary birthday/Holiday gifts, etc.
Hire a Financial Adviser
If all of this seems daunting, considering hiring a financial advisor to help you prioritize your financial goals and plan for your future. A reputable financial adviser will work with you to understand your income and budget and create personalized retirement, savings, and investment plans to help you achieve your desired goals. To find a reputable financial advisors ask your family or friends for recommendations or visit the Association for Financial Counseling & Planning Education for a list of certificated professionals.
- Easily Save Money Throughout the Year
- Tips to Help You Save Money on a Limited Budget
- How to Better Manage Your Money