If your answer is no to any or all of the questions above, don’t panic. According to the Bureau of Economic Analysis, the average American puts less than 5 percent into his or her savings, and many Americans don’t have a savings account at all. If you’re battling overwhelming debt, struggling to control your spending, or just don’t know where to begin, there is a road map to financial freedom. Just follow these steps.
Create a Budget
You can’t save or pay down debt until you know what you are spending. Creating a budget for the first time can be intimidating, but You Need a Budget (YNAB) makes it simple and automated. YNAB is budget software for the computer, tablet and smartphone that tracks income and spending to help you budget money and get a grasp on money coming in and money going out. You enter each purchase, assign it to a category, and YNAB does the rest. TheCentsibleLife.com offers many shopping hack, as well as money-saving gift and service ideas to save you throughout the year.
Build an Emergency Fund
Life will throw you curve balls—a job loss, medical emergency, car trouble—and you need cash in the bank to prepare for the worst. Before you tackle your debt, save a balance of at least $1000 and stash it away in a high-yield savings account used only for emergencies. Ally Bank has a variable interest rate of 1 percent, higher than most traditional banks (and you won’t be tempted to transfer it back to your checking in a crunch). Once your credit card balance is down to zero, remember to pay the full balance each month if you continue to use them.
Take the 401(k) Match
If your employer offers a 401(k) retirement match, take it, but only up to the match and no further. The employer match is free money and you can worry about putting more towards retirement down the road.
Pay Off Credit Cards
Unless you have a high-interest loan like a payday or car title loan (not the same as a traditional car loan), credit card balances probably carry the highest interest. Math would tell you to pay off the card with the highest interest rate first and work your way down, but financial expert Dave Ramsey argues for the Snowball Method to pay down credit cards.
Now is also a good time to get a copy of your credit report and check for any irregularities. If you think you might be the victim of identity theft, it’s a good idea to invest in an inexpensive identity theft protection service to monitor your credit activity.
Pay Off Auto Loan
If you still owe money on your car, now is a good time to tackle the balance. Auto loan interest rates are typically higher than the interest you could earn on a retirement or investment account (more on that in a second), so you should address this debt first.
Invest in a Roth IRA
Even if you have student loans and a mortgage, you are now better off than a significant portion of the population with no credit cards and no car loan. Congratulations! Now is the time to plan for retirement and open a Roth Individual Retirement Account (IRA). In short, the “Roth” in Roth IRA ensures your money grows tax free so you don’t have to pay income tax when you make withdrawals after retirement. The law allows you to contribute up to $5,500 per year toward your IRA.
Add to Your Emergency Fund
You are well on your way to financial freedom. You have no credit card debt, no car loan and two retirement accounts (if you took the 401(k) match). Now is the time to save at least 10 percent of your take-home income per paycheck and build up your emergency fund. There are many other ways to create wealth and work towards a prosperous future, but if you made it this far than you are in fantastic shape.