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With all the financial advice out there, it can be hard to know what to do first. Should you save for retirement or pay off student loans? Do you really need an emergency fund, or should you get rid of your credit card debt as fast as possible? If you’ve ever wondered, “Where should I put my money?” this article is for you. We’ll cut through the noise and make it easy to decide the best place to put your money, step by step.
Where should I put my money?
This list of where you should put your money is in order from most important to least important. Once you’ve completed the first step, you can move on to #2, and so on. But remember that while this is a suggested order, everyone’s personal finances are, well, personal. Only you know your budget and goals, and it’s up to you to find the best balance for your financial well-being.
1. Cover your living expenses
Have you ever heard the expression, “Pay yourself first”? Well, that’s a good rule to live by when deciding where to put your money.
Before you can think about saving or paying off debt, you need to make sure you have enough to cover your living expenses. This includes rent, utilities, food, childcare, and any other necessary expenses.
While this step sounds simple enough, a lot of us have no idea how much money we need from month to month. If you’re not sure, take some time to write up a budget and identify your major spending categories.
Be realistic about how much you need to cover living expenses. If you’re overspending, look for ways to cut back.
Once you have a clear sense of your income and expenses, you can set aside the right amount from your paycheck to cover your needs.
2. Build your emergency fund
After you’ve set aside money to cover your living expenses, your next priority for how to manage your money should be building your emergency fund. If we’ve learned anything in the past few months with the coronavirus pandemic, it’s that we can never predict what’s going to happen.
That’s why it’s crucial to have an emergency fund in case you lose your job or run into an unexpected expense. Most financial experts recommend building an emergency fund that could cover two to three months’ worth of your living expenses.
This might sound like a tall order, but it is possible over time. Figure out what your target savings goal is and how much you’d have to put aside per week or month to meet it.
If possible, set up a separate savings account and automate a transfer from your checking to your savings on a weekly or monthly basis. The best place to put your money for your emergency fund is a high-yield savings account.
Ally Bank and Discover, for instance, both offer 1.50% on savings accounts as of April 2020. In a high-yield account, your emergency savings can quietly grow. Hopefully you won’t need to use your savings at all, but you’ll have peace of mind knowing you have a financial cushion to fall back on, just in case.
3. Max out a 401(k) match
Once you’ve covered your living expenses and emergency fund, it’s time to think about saving and paying off debt. We recommend starting by maxing out a 401(k) matching benefit, if your employer offers one.
Why? Well, a 401(k) match is basically a 100% return on investment, and you’re not going to get as good a return anywhere else. If your employer matches 4% of your 401(k) contributions, make sure to contribute at least 4% of your salary to get the full match (if you can afford it).
That way, you won’t be leaving any free money on the table. Along similar lines, max out your employer’s student loan matching benefit if they offer one.
4. Pay off high-interest debt
Next up is paying off high-interest debt. If you’re carrying balances on credit cards, for example, make it a priority to pay them off, since credit cards can have sky-high interest rates of 17% or higher.
You should also focus on personal loans, auto loans, or student loans that carry interest rates around 7% or higher. One strategy to help with debt payoff is the debt avalanche method.
Basically, this method has you line up your debts in order from highest interest rate to lowest. Then, you throw extra payments at your debt with the highest interest rate until you’ve paid it off.
Learn more about the debt avalanche method of debt repayment (and how it compares to the debt snowball method) in this guide.
5. Save for retirement
Saving for retirement is also important, whatever age you are. Since historical returns are around 6% to 7%, it can be a good idea to prioritize high-interest debt before going all in on retirement savings.
But if you can swing it, it’s still a good idea to contribute at least a little bit into a retirement savings account, such as a 401(k) or IRA, as often as you can (even if you’re paying off debt at the same time). Thanks to compounding interest, your retirement savings will grow bigger the more years you have to save.
Plus, starting early will allow your savings to weather ups and downs in the market. Even if you just graduated and retirement feels far away, it’s a good idea to start saving as early as possible. Future you will appreciate it!
6. Save for your other goals
Once you’ve met your financial obligations, you can feel free to save for your other goals. Maybe you want to buy a house or travel to Bali (once traveling is allowed again, that is).
Whatever your personal goals, you can pursue them knowing that you’ve taken care of your other financial priorities.
And if you’re struggling to cover all these steps, look for ways to reduce your spending or increase your income, whether through applying for a new job or supplementing your income with a side hustle.
Finding the best place to put your money
When it comes to how to manage your money, many of us aren’t sure where to start. After all, most of us never got a class in personal finance in school.
But it’s important to learn how to manage money so that you can balance your financial obligations and save for the future.
If you follow this general order for where you should put your money — covering living expenses, saving in an emergency fund, maxing out an employer match, paying off high-interest debt, and saving for retirement — you should be in good shape.
And don’t forget about other moves you can make to boost your financial health along the way, such as increasing your income or refinancing loans to lower interest rates.
In the end, it’s up to you to strike the right balance for your personal circumstances. To learn more about deciding whether to pay off debt or save for the future, head to this useful article.
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