The end of the year is always a busy and chaotic time. In the hustle and bustle of putting up decorations and shopping for gifts, you should also take a moment to assess your financial priorities for next year. What will you focus on? Is it debt reduction or boosting savings or should you consider both?
Determining Financial Priorities
Your current financial obligations are the biggest factor in determining what your priorities should be. With this is mind, everyone’s top priority is to have an effective budget in place. The act of designing or reassessing a budget provides a clear picture of your expenses vs. income. It also shows how much money is left over to devote to other financial goals. Once you have a budget in place, it’s time to think about how to best use your extra funds.
Prioritized Financial Goals
- Credit Card Debt Elimination – If you have outstanding credit card debt or have carried a balance for multiple months, then priority number one is to reduce credit card debt. This is often the highest interest debt you can have. Getting credit cards paid off improves credit and allows you to focus on other financial goals.
- Establishing an Emergency Fund – Once you’ve eliminated credit card debt, the next move is to protect yourself from falling into debt again. Putting a little aside into a separate account each month establishes a real safety net rather than thinking you have one using credit cards. Most experts recommend saving at least three months worth of expenses for emergencies. Saving six to nine months is a good target.
- Saving for Retirement – The next priority is boosting retirement savings. After credit cards and emergency funds are secure, consider bumping up contributions to your 401(k), IRA, or Roth IRA. If your employer matches funds, then contribute at least the maximum matched. Compounding interest on retirement accounts means the earlier you save, the faster it grows, which elevates this priority.
- Student Debt Reduction – Student loans come only slightly after retirement savings. Financial experts suggest establishing retirement savings before focusing on student loan repayment because of compounding interest. Student debt is easier to manage alongside other financial priorities thanks to low fixed interest rates and certain student loan solutions that offer flexibility to borrowers. Things like repayment schedules and loan terms are adjustable for federal student loans.
- Lifestyle Savings – The final financial priority is to save for the purchase of a house or a car. When making these large life-changing purchases, having at least a 20% down payment and good credit will mean better loan terms. Completing the above priorities first means you can safely save for making a lifestyle leap.
Like maintaining an effective budget, there are some priorities that never change. It is important for your financial standing to stay current on all accounts. This requires that you make at least minimum payments to all outstanding debts to avoid a negative credit report notation. Additionally, monitoring your credit report is another priority that should always be on your radar.
Organizing your priorities before the end of the year is a great way to set yourself up for success. Financial stability is within reach if you take the time to identify where to focus your efforts and plan accordingly.
If you’re struggling with debt management, consider speaking with a credit counselor at ACCC today by calling 800-769-3571.