By now as a long time LMM listener, you have a financial plan. But do you know how to prioritize it? We’ll explain how best to get your ducks in a row.
Matt and Andrew got into a pillow fight the last time they tried to do a show on this topic this takes two. The good folks over at LearnVest set out a list of three financial priorities. Retirement, emergency savings and debt.
1. Retirement comes first. Because of inflation, the dollars you have now will be worth less than when you retire so you need to accumulate those dollars now. Most of us will also not be able to rely on social security or pensions once we stop working. Pay yourself first whatever that means for you, 401K, Ira, Roth IRA etc.
2. Emergency Savings. Have a rainy day fund otherwise, you have to rely on a credit card which may mean racking up lots of interest charges or you’ll draw from your retirement account which means robbing the future you.
3. Debt. Debt is an emergency, this is a no-brainer.
We have some issues with this list. If you have debt, that should be higher on the list. We would put retirement first only so far as you are getting matching funds from your employer.
Mortgage and student loan debt with low-interest rates get a bit of a pass on the “debt is an emergency” category. If your student loan interest rate is high, refinance with a company like Earnest to get the rate reduced.
Credit card debt and in some cases, car loan debt, are emergencies and should be dealt with first. Once you have money going into your matched 401K and your credit cards are paid off, save one and a half to six month’s expenses in a checking account. Once you reach that you start investing in something like Betterment or Vanguard up to $25,000.
Now you can start playing around a bit. Maybe buy individual stocks you are interested in, emerging markets, Lending Club. You can also start going after your low interest student loans and mortgage.
There was some contentiousness in this episode because some of these rules are so dependent on each person’s situation and various interest rates. The interest rate drives the urgency.
Rogue Farms Pumpkin Patch Ale: The perfect October beer.
Village Idiot Punk O’ Lantern: A local Jersey brew.
Betterment: The easy way to invest.
Vanguard: Next level investing.