It’s hard to know where to start. Do you pay off debt or save? Rent or buy a home? Save for a rainy day, or go on a once in a lifetime trip? Don’t let too many decisions keep you stuck with analysis paralysis.
Should you pay off debt or save first?
To address the dilemma of whether to pay off debt or save first, I created The Finance Plan. It’s a step-by-step proven plan with money. This is the roadmap you’ve been looking for with money. The Finance Plan is your step 1, 2, 3, 4 with money. I’ve taught it to thousands of people and it works.
This is part of new series called, ‘How to Manage Your Money’
- (Week 1) How to find your motivation to get out of debt and save
- (Week 2) How to Set Money Goals?
- (Week 3) Where do you start with money? Overcome analysis paralysis with a proven plan
- (Week 4) What app, tools, or resources are the best to manage money?
- (Week 5) How to get out of debt ASAP
- (Week 6) How to stop emotional impulsive spending (and live within your means)
- (Week 7) Why you NEED to invest now for retirement
Don’t miss out on this series. Enter your email and schedule your 15-minute money coaching call
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YAAS. I Want to learn How to Manage My Money
Are you ready to overcome analysis paralysis and learn The Finance Plan? Yep, you were born ready.
Step 1: Save 10% of your income
The first step with The Finance Plan is to save 10% of your pay. There are different schools of thoughts with money. Some experts advocate to stop contributing for retirement until you’re 100% debt-free and all your student loans and car loans are paid in full.
Common sense says to always live below your means and save for your future.
Plus, if you’re really on a mission to get out of debt, you need to have savings in place to prevent taking on more debt for unexpected emergencies.
The one catch is when paying off debt, of the 10% you’re saving, put 5% towards a starter emergency fund (liquid cash savings account for a rainy day), and the other 5% towards retirement (long-term investing).
For example, let’s say Average Joe makes $3,000 a month, he’d save $300 total a month. When paying off debt, $150 (5%) will go to an emergency fund (liquid cash savings) and $150 (5%) will go to retirement (long-term investing).
Step 2: Get out of debt
The second step with The Finance Plan is to get out of debt.
Does it ever feel like as soon you get paid, your money’s gone? Easily, a third or more of your income can go out the door to pay off what you owe, not to mention thousands of dollars that go down the drain to pay the interest. It doesn’t have to be that way.
Imagine having no monthly debt payments.
Get out of debt like a Spartan.
Sparta was an ancient Greek city-state. The Spartans were known for their discipline, structure, and endurance. The 300 Spartans fought against the much larger Persian army.
You may have seen the movie 300, where King Leonidas (or Gerald Butler) yells, “Sparta, this is where we FIGHT! AHH.”
You didn’t get in debt overnight and you aren’t going to get out of debt overnight either.
To get out of debt you need to have discipline, structure, and endurance with your money! Pay off debt by paying ALL your monthly minimums plus $300 or more, to your highest interest debt each month. When the highest interest debt is paid, you’ll take what you’re were paying to that debt, plus the extra Spartan amount to pay towards your next highest interest debt. So on and so forth until you are completely debt-free!
Why pay $300 more? It’s like the Spartans: few, but strong.
Three hundred dollars is small enough pretty much anyone can do it by cutting a few things or bringing in an extra income on the side. It’s big enough to really make huge progress.
For example, Average Joe owes $40,000 with monthly payments of $890. He’ll pay $890 plus an extra Spartan amount of $300 to the highest debt each month. He’ll be debt-free in 36 months.
Following The Finance Plan, when Average Joe is debt-free he’ll also have a starter emergency fund of $5,400 AND $5,400 for retirement (this is $150 saved a month times 36 months).
In short, when it comes to the dilemma whether to pay off debt or save, you can pay off debt AND save.
Step 3: Save for an emergency fund
Once you’re debt-free, start investing all 10% to go to retirement (long-term investing). Then, the third step with The Finance Plan is to save 3-12 months’ worth of expenses for an emergency. I’m the biggest advocate for having an emergency fund, perhaps because I am entirely accident prone. I’m a magnet for things going wrong.
A key part of a financial plan is having savings for a rainy day to tackle life’s little unpleasant (and oftentimes pricey) surprises.
Sound impossible to have thousands of dollars saved for a rainy day? It’s not as hard as you think to have an emergency fund. After your debt’s paid off in full and you’re automatically investing 10% of your pay, then you can save to have a complete emergency fund in no time.
Following The Finance Plan, in step three you turn a liability (what you owe, your debt payments) into an asset (what you own!). Those student loans, car loans, and credit cards used to drag you down, but now you’re debt-free! The money that once went straight out the door to what you owe, is now yours to keep.
For example, Average was paying $890 plus an extra Spartan amount of $300 to debt every month. The $1,190 will go to completing an emergency fund. Within eleven months of becoming debt-free, Average Joe will have a complete 6-month emergency fund of $18,000.
Step 4: Save for life purchases (buying a home or car)
The fourth step is with The Finance Plan is to save for life purchases like buying a home or car. At this point with The Finance Plan, your retirement savings is off to a great start, you’re debt-free with no monthly debt payments, and you’ve got money in the bank for a rainy day.
Now the sky’s the limit.
You can save up for the fun things in life like buying a home, car, tuition to go back to school, or retiring early. You can save up for these life purchases by continuing to turn a liability into an asset. What you were paying to debt, you can now save!
For example, Average Joe can save $1,190 a month for a down payment on a home or to outright buy a car with cash!
A quick real-life story of how this plan works.
Newlyweds Jessica and Matthias owed $61k.
Matthias (an engineer) ran four or five spreadsheets analyzing the best way to pay off debt. For the longest time, they could. not. decide. where to start with money. The indecision resulted in inaction. They only paid the minimum debt payment and didn’t make progress paying off debt or saving.
Her advice is to “Have faith the change is going to work. Change is hard and scary. Once you’re familiar with your new normal, it’s no longer hard.”
If they did it, so can you! My mission is to help people pay off debt and build savings. Let’s chat. Schedule your 15-minute (free!) money coaching session with me click here.
As always, remember you only live once. Be smart with your money now.