You can look for ways to spend less when you dine out, replace some restaurant meals with homemade ones or do a combination of the two. An emergency fund is money you set aside specifically to pay for unexpected expenses. She says finding at least one thing in your budget to cut back on can help fund your emergency savings. Another way to build emergency savings is through decluttering and organizing, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network , an online financial service for consumer debt settlement, mortgage shopping and personal loans.
You can make extra money by selling unneeded items on eBay or Craigslist or holding a yard sale. Consider turning a hobby into part-time work where you can devote that income to savings. While you probably have other savings goals, too, like saving for retirement , creating an emergency fund should be a top priority. Experts disagree on whether to pay off credit card debt or create an emergency fund first. Some say that you should create an emergency fund even if you still have credit card debt because, without an emergency fund, any unexpected expense will send you further into credit card debt.
Others say you should pay off credit card debt first because the interest is so costly that it makes achieving any other financial goal much more difficult.
Pick the philosophy that makes the most sense to you, or do a little of both at the same time. As a strategy for paying off credit card debt, Davis recommends listing all your debts by interest rate from lowest to highest, then paying only the minimum on all but your highest-rate debt. Use any additional funds you have to make extra payments on your highest-rate card. The method Davis describes is called the debt avalanche. Another method to consider is called the debt snowball. With the snowball method, you pay off your debts in order of smallest to largest, regardless of the interest rate.
Consumers can get out of debt in two to four years this way, Gallegos says. The drawbacks are that debt settlement can hurt your credit score and creditors can take legal action against consumers for unpaid accounts.
These goals will create a bridge between your short- and long-term financial goals. Do you have a spouse or children who depend on your income? If so, you need life insurance to provide for them in case you pass away prematurely.
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An insurance broker can help you find the best price on a policy. Most term life insurance requires medical underwriting, and unless you are seriously ill, you can probably find at least one company that will offer you a policy. Gallegos also says you should have disability insurance in place to protect your income while you are working. It can provide a larger benefit than Social Security disability income, allowing you and your family, if you have one to live more comfortably than you otherwise could if you lose your ability to earn an income.
There will be a waiting period between the time you become unable to work and the time your insurance benefits will start to pay out, which is another reason why having an emergency fund is so important. Lowering or getting rid of those payments can free up cash that will make it easier to save for retirement and meet your other goals.
One strategy that can help you pay off your student loans is refinancing into a new loan with a lower interest rate. But beware: If you refinance federal student loans with a private lender, you may lose some of the benefits associated with federal student loans, such as income-based repayment, deferment, and forbearance, which can help if you fall on hard times.
The Complete Guide to Living Below Your Means
Mid-term goals can also include goals like buying a first home or, later on, a vacation home. Maybe you already have a home and want to upgrade it with a major renovation—or start saving for a larger place. College for your children or grandchildren—or even saving for when you do have children—are other examples of mid-term goals. Once you've set one or more of these goals, start figuring out how much you need to save to make a dent in reaching it.
What Does Financial Freedom Mean to You?
Visualizing the type of future you want is the first step toward achieving it. The biggest long-term financial goal for most people is saving enough money to retire. Petersburg area, says you can do a quick back-of-the-envelope calculation to estimate your retirement readiness. Estimate your desired annual living expenses during retirement. The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healthcare expenses in retirement.
Subtract income you will receive. Include Social Security, retirement plans, and pensions. This will leave you with the amount that needs to be funded by your investment portfolio. Estimate how much in retirement assets you need for your desired retirement date. Base this on what you currently have and are saving on an annual basis.
An online retirement calculator can do the math for you. Highest initial withdrawal rate for retirement that has survived all historical periods in U. For simplicity, we have not included the rate of return that would be earned over the next 10 years on the current investments. Just get back on track as soon as you can.
The same is true if you lose your job or get sick. Having the cash on hand to cover an unexpected life event gives you peace of mind and is a critical part of your overall financial plan. Create a line item in your monthly budget and divide the total amount by the months you have to save.
Start With an Honest Conversation
The good news is the sooner you start investing, the more time your money has to grow. Start by working with your financial advisor to take advantage of the tax-favored retirement accounts that are available to you at work, like your k or b. How much should you invest toward retirement? And if your employer offers a match on contributions to your k , take it!
If you have access to a Roth k at work with good mutual fund options , great! Why is a Roth a good idea? Income limits do apply, and your investing pro can help you know if those impact you. If you want to save beyond an ESA, talk to your financial advisor about a plan. These plans also grow tax-free! Just be aware that there are some plans you should avoid.
How to make better financial decisions for life
Steer clear of pre-paid tuition plans and fixed investment options. Your home should be part of your plan for financial freedom, not something holding you back from achieving it. If you buy a home that is a good investment, it will continue to grow in value as the years go by. Attack it with a vengeance! Getting rid of your mortgage is a huge milestone in your journey to financial independence. You should also be prepared to pay taxes on capital gains and qualified dividends.
But choosing mutual funds with a low turnover rate can help you minimize the tax impact. Making the right investment decisions is the first step, but staying in tune with your fund performance is crucial to getting the most out of your investments. Setting your investments on autopilot is not an investment strategy. But the idea of actively making decisions about your investments may feel overwhelming.
How to make healthy financial choices
You need the expertise of a financial advisor to help you navigate your investment options and brave the ups and downs of the stock market. With our SmartVestor program, you can find investing professionals to help you achieve your financial goals. Remember, the journey to financial independence is a marathon, not a sprint. An expert financial advisor is the perfect partner for the journey. Ready to get started? You can connect with a pro today!
Financial freedom is about more than just being able to cover unexpected emergencies—like a car repair—without breaking a sweat. The fun really starts when you realize you can meet the needs of others. Imagine being able to bless a struggling family by paying for their car repair! If you live like no one else, later you can live and give like no one else. Chris Hogan is a 1 national best-selling author, dynamic speaker and financial expert. For more than a decade, Hogan has served at Ramsey Solutions, spreading a message of hope to audiences across the country as a financial coach and Ramsey Personality.
Hogan challenges and equips people to take control of their money and reach their financial goals, using The Chris Hogan Show, his national TV appearances, and live events across the nation. Back Home. Back Get Started. Back Shows.