I recently wrote an article about effectively following through on your New Year’s resolutions. If you want to make long-lasting and meaningful changes in 2020, start with your financial bucket list. Just like learning a new language or losing weight, a financial bucket list should contain lofty, yet attainable goals.
1. Create a 3-Month Emergency Fund
An emergency fund typically has 3 months of expenses saved in cash. This is money you can use any time to cover unexpected expenses, like a medical bill or home repair.
More than half of households in the U.S. DO NOT have an emergency savings account. This is a dangerous position to be in because it forces you to borrow on credit cards, which often carry APRs (annual percentage interest rates) of 20% or more. If you use your credit card for a $7,500 medical expense and fail to pay off the balance the following month, you are paying over $1,500 in annual interest!
I personally have a separate checking account through Charles Schwab to separate my “emergency funds” from my other money. I have $6,000 deposited and have it invested in Schwab’s Value Advantage Money Fund. It pays me 1.53% annual interest and allows me to withdraw the money at any time, proceeds available the next day.
2. Own Your Home
Your rent is likely your largest expense. Imagine entering your 40s or 50s without that expense! You likely cannot buy a house or apartment right now, but a good way to work toward this goal is to put money toward a down payment. An attainable goal might be five years to purchase a home. The sooner you save for a down payment and buy a house, the sooner you will be free from paying rent.
Let’s run the numbers. The median apartment price in downtown Chicago is $250,000. 20% down would be $50,000. If your goal is to save for a down payment in 5-years, you should be putting away $10,000 a year, or about $830 a month. If you make $50,000 a year, putting away 20% of your paycheck will get you to a down payment in 4 to 5 years.
3. Eliminate Debt
Speaking of debt, it is important to be debt-free ASAP. We are talking about credit card debt, student loan debt, and car payments. The only debt that I would recommend is debt taken on to purchase income generating assets, like a property or a business.
The most daunting debt facing my generation is student loan debt. The average balance is approx. $35,000. I cannot stress enough how important it is to deal with your debt. It can be one of the biggest stressors when dealing with your finances. Sit down, organize your debt, and commit to paying it off. It will give you a peace of mind.
4. Cutting Any Unnecessary Expenses
Cut out unnecessary expenses. Getting rid of a rarely used gym membership or daily stops at Starbucks can save you $100+ a month. You might start small, saving just $100 a week and working your way toward 15% of every paycheck. $100 a week is $400 a month. If you do this for 5-10 years, this is a down payment on a house!
Set up an automatic withdrawal from your paycheck into a separate savings account.