5 Steps to Getting Your Finances in Order
“Where do I begin?” is a question nearly everyone faces when they first try to get a handle on their finances. But if you start small, aim for steady progress and tackle your financial goals in an order that takes into consideration your life stage, the answers can begin to build — just like your potential retirement savings.
1. Cut and consolidate debts
Carrying too much debt can be a surefire way to keep yourself poor. To ensure that you end each month with bills paid and money left over:
- Use a budget to manage spending so you stop adding to your debt load.
- Pay your high-interest credit cards first, in full and as soon as possible.
- Lower your interest rates by switching to a lower-rate credit card or simply by calling your lender and asking for a rate reduction.
- Always pay more than the minimum required on any credit card.
- Look for opportunities to refinance to lower interest rates without taking risks (such as with adjustable-rate loans).
2. Enroll in a health savings plan
Two plans allow you to set aside tax-sheltered money for health care. Besides cutting your tax bills, they can help ensure that you’ll have money on hand in the event of a health emergency.
- A Flexible Spending Account (FSA) lets you set aside pre-tax income to pay for health-care costs not covered by insurance. The catch: You have to spend all the money in the account within a set period (usually 12 to 15 months).
- A Health Savings Account (HSA) lets you put aside money in a tax-free investment account, as long as you have a high-deductible medical plan. You use money from the HSA to pay medical bills not covered by your health insurance. Unlike an FSA, unspent money in an HSA rolls over to the next year and can grow over time.
3. Make the most of your retirement plan
If your employer matches a share of your contributions to the retirement plan, set a minimum goal of contributing enough to earn the full match. Financial experts universally agree that passing up this match is a mistake. The benefit is even sweeter because both your contributions and your employer’s match are sheltered from taxes until you retire and take the money out.
4. Open a Roth IRA
Once contributions to your employer’s retirement plan are on track, many financial experts recommend a Roth Individual Retirement Account (IRA) for those who qualify. You contribute after-tax money, but you pay no federal income taxes on your qualified earnings when you make withdrawals. For young workers who might be in a low tax bracket, paying the taxes now could mean avoiding paying more if they’re in a higher bracket when they retire.
Roth IRAs also add some financial flexibility because you can withdraw your contributions (but not your gains) without incurring the 10 percent early-withdrawal penalty. That can make a Roth IRA a handy last resort in an emergency.
5. Create an emergency fund
Aim to accumulate enough cash to cover your own real-world worst-case scenario, whether that happens to be money for a roof repair, a broken transmission or an emergency flight to aid an ailing loved one. Many experts recommend keeping three to six months of living expenses on hand in an emergency fund. That way, you won’t have to use a high-rate credit card if worse comes to worst.
Once you have an emergency fund established, put the money to work for you. While a traditional savings or checking account may be convenient, a money-market account might provide a better yield.
Take the next step...
Consider consolidating your debts and pay off high interest rate credit cards with a home equity loan at The Principal Bank.
