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How to Calculate Your Savings, Emergency Funds, and Debt

We all need to learn how to manage our money and as we get older, our money management skills are put to the test more and more each day. Between rent, car insurance, the phone bill, groceries, the gas bill and even the water bill, our monthly expenses add up pretty quick. Without creating a solid financial plan with your partner, things can get out of control before you know it. Here’s some helpful tips on how to start saving, set up and emergency fund and ultimately pay down all your debt.

Save $1,000

Putting a financial buffer between you and the unexpected is the first step toward building financial security for you and your family. Sit down and compile a list of all your monthly expenses and compare this number with your monthly net income. Whatever breathing room you have in your budget after all expenses are paid should be put toward your $1,000 emergency fund.

If there’s no wiggle room for saving, it’s time to begin find areas in your budget to reduce your overhead. This could mean eating out less, getting rid of cable or doing away with anything that is a non-essential. Everything is on the table. You might consider selling a few items or even picking up a part-time job until you’ve reached your $1,000 goal. That way, you’ll be prepared to face any emergency without going further into debt.

Pay Off Those Credit Cards

Once you have your financial safety net in place, it’s time to begin pulling yourself out of debt. Begin by paying off the credit card with the lowest balance and APR. This method is popularly known as Dave Ramsey’s “Snowball Effect.” By paying off an easy debt, you’ll free up a little more cash each month to put toward your next largest balance, and the satisfaction of paying a credit card off will keep you motivated to press on with the next debt on your list.

Build a 3-6-Month Fund

Now that your revolving debs are paid off, you should have extra money available to begin setting up another financial security net that’s even more comprehensive than your $1,000 emergency fund. This will be the savings that you should be able to live off of for 3-6 months in the event of a job loss, illness or other financial emergency.

The cost of living for a 3-6-month period will vary from one household to another, but the average American family would need a savings of $10,000-$15,000. While saving this amount of money may seem daunting, it shouldn’t be nearly as difficult with no debt weighing you down. Set up a savings plan and stick with it. In about 1 to 3 years, you should be able to successfully reach this savings goal.

Invest

By this time, you should be feeling pretty good about your financial status. You should have no credit card debt and 3-6 months of living costs in the bank, along with a $1,000 emergency fund. Feels pretty good, right? We’re not done just yet. Now it’s time to think about your future and investing is one of the smartest financial moves that you can make for you and your family.

It is now time to start investing 15% of your monthly income into a 401(k), Roth IRA or a traditional IRA account. You can choose from a wide variety of investment firms, or even consult with your employer’s HR department for advice on investing options. Most employers offer their full-time employees a 401(k) and many offer some sort of match up to a certain percentage.

Pay Off Your Home

After all is said and done, there’s just one more thing to tackle and it’s a big one; your mortgage. If you’re a home owner, you’re probably locked into a 30-year mortgage that you’re still making monthly payments on. After completing all the previous steps, now’s the time to start paying down that mortgage.

To help you pay off your mortgage quicker, you should refinance to a 15-year fixed-rate mortgage. On average, it takes about 5-7 years to pay off a home early, and there is nothing more rewarding than truly owning your home and no longer throwing your money away on interest.

After taking these crucial steps to better your financial standing, the idea of accumulating debt or using a car title loan to get fast cash will seem completely ludicrous. Tackle these steps one at a time and commit yourself to these ideas as much as you can. Remember, following these financial guidelines can ultimately lead to your financial independence, but following through on them will take a lot of hard work and discipline on your part. Keep your eye on the prize and give it your all - your future self will be happy you did!