If you’re a young professional, chances are you’ve started to think about paying off debt, like a school loan or a credit card, and saving for your future, be it long-term goals like retirement or short-term goals like a new car or a house. When you only have so much disposable income, what should you to contribute to, and in what order?
Step 1: Create a Budget
Before you can make any financial decisions on paying off debt, saving, or making purchases, you need to put together a budget that considers important factors like your income, your monthly expenses, and any debt you may have, like student loan debt.
Step 2: Build an Emergency Fund
The predicament of an illness or a job loss can worsen if you don’t have the savings to support yourself, so it’s recommends putting away three to six months of your living expenses for such an event.
Step 3: Contribute to your 401K
Unfortunately, many young professionals don’t think they need to save for retirement this soon, but it can be one of the smartest ways to protect yourself from taxes, so you can keep more of the money you earn.
Step 4: Pay Off High Interest Credit Cards
You may have signed up for a credit card with an introductory low- or no-interest rate. If so, you’ve probably seen that introductory rate expire, and your interest rate jump to anywhere from 10 to 25 percent. All of a sudden that credit card is costing you big bucks, and you should pay it off as soon as you can
Step 5: Pay Off Private Student Loans
These private loans often have higher interest rates, between five and 12 percent.
Step 6: Contribute more to your Retirement Savings
If you’ve gone through the previous steps and you still have money to spare, you may benefit more from growing your long-term investments than you would from paying off that lower interest rate debt, like mortgages, government student loans, and car payments.
Step 7: Tackle Low Interest Loans
The last step is to tackle those low-interest loans. Until you’ve covered all of the previous steps, it is recommended making just the monthly payments on lower-interest loans such as mortgage loans, car loans, and government student loans because these types of debts carry lower interest rates.
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