Solutions 4 Financial Independence: 9/27/18
Question: Today's question comes from Mikey from Bridgeport. "I am currently earning great money working for an energy company and want to get our finances back on track. We have several credit cards, along with loans, and no short-term savings. We have $5,000 a month that we could allocate somewhere. Where should we get started?
Answer (John Halterman-Beacon Wealth Management): Well, Mikey, congratulations on taking this first step. I think too many times, we get a little overwhelmed when it comes to money and we just kind of give up.
The fact that you're addressing it, and saying, "I've got so much money, I'm going to be setting aside." One thing I tell a person is, the first thing you should figure out, is how much you do what you do, figure out exactly what you can allocate, and then lets figure out buckets of money. When I say "buckets of money," obviously you've got some debt that needs to be paid off, and you don't have short-term savings. I'm not a fan of not having short-term savings. I'm a firm believer that having a minimum of 6 months' worth of expenses in what we call a "Rainy Day Fund."
Now, one thing I'll tell you though, is that with your debt, too many times when people have multiple credit cards or multiple loans, they try to pay them all off simultaneously, but what I always say is look at your open-ended credit. The things that are credit cards that don't have a fixed payment to them, and then figure out which one is the highest amount, and focus on paying it off first. Once you pay one off, then move to the second one, until you continue down to paying them all off. Fixed loans though, I'm not too worried about those.
Question: So what's more important than, paying of his debt or an emergency fund?
Answer: That's a great question. You know Mikey, you got to do it simultaneously, because in this situation, a lot of high-interest debt is going to kill people, especially when you have high-interest credit cards, and then also, not having a "Rainy Day Fund." I see this too many times, where people in cyclical industries, where they make a lot of money, and then they get laid off for a little bit, and they don't have anything to live on, and that's what really kills people.
So, building up your emergency fund and paying of your debt simultaneously, I would really take about 50% of each of those moneys and focus on that. Once we get your "Rainy Day Fund" built up, then we start focusing on the long term. But let's get those two things taken care of first.