The guys got a great listener question a few months ago – from a husband and wife team who listen to the podcast together! — and are taking it on for this episode.
The question: how much should you save and invest if you have debt?
This is a good one to cover, because it’s difficult for most people to get through life without taking on any debt at all. Most of us don’t have over a hundred thousand dollars lying around in cash to put down on a home, or that same amount again to pay for higher education costs.
So we take out mortgages and student loans. (Or we just don’t yet have good money management habits and end up overspending on the credit card.)
Whether it’s good debt or bad debt, chances are you’ve had a little bit of it — which means you’ve had to juggle multiple financial goals, too.
We need to save and invest wisely for retirement, establish an emergency fund, repay debts (be it consumer credit card debt or a car loan or a mortgage),and more.
The Basics of How to Prioritize Financial Goals
Brian and Bo go over some of the basics that we can all abide by when it comes to prioritizing financial goals:
- Pay yourself first: That means taking care of your retirement needs first. You need to be able to take care of yourself financially (now and in the future), so this should almost always be at the top of your priority list.
- Have an emergency fund: Again, this goes back to taking care of yourself. That emergency fund will help safeguard you against unexpected expenses that could push you into debt.
- Get rid of debt: Once you’ve secured your savings, it’s time to look at aggressively paying down any debts you may have.
The exception to this order? When you have high-interest rate debt. Usually associated with credit cards, debts with interest rates over 8% or so are your financial emergency, and need to be addressed immediately. That doesn’t mean sacrifice savings entirely — but it does mean making room in your budget to pay down debt.
Ideally, you’ll be saving 15% to 20% of your gross income for your retirement. But that may change depending on your debt situation. Again, it all depends on that interest rate.
Avoiding Money Wasters
Prioritizing your goals will get a lot easier if you can avoid some financial pitfalls that many Americans succumb to. The guys took a look at a list republished by J. Money at Budgets Are Sexy to see what average people wasted the most money on.
One of the biggies was no surprise: credit card debt. This is a huge waste of your hard-earned money and a great reminder of the importance to live within your means and avoid spending more than you can truly afford.
Others that Brian and Bo point out are deal websites (with a great quote from another financial blogger, Frugalwoods) and fees (along with a tip on getting out of them from time to time).