Although everyone wants to be a financially responsible person, it’s not that easy to be one in reality. There are lots of things you need to do. You have to build an emergency fund, save dollars for retirement, and pay off debts. Okay. You’re ready to do all the 3 things. But how to accomplish this difficult task. How should you allocate money towards emergency funds, retirement savings accounts, and debt repayments? How much should you allocate?
Here are the 4 tips to clear your confusion.
1. Save $1000 in your emergency fund:
The first thing you need when you’re in a financial crisis is a mini emergency fund. It helps you to book flights at the last-minute or repair a car that met an accident yesterday or renovate the broken water pipe in your kitchen without borrowing money from anyone. Remember, whenever you borrow money from anyone, you’re inviting debt in your life.
A mini emergency fund helps you in leading a debt-free life.
You need only $1000 to build an emergency fund. If the amount seems too much for you, then you need to think of the ways to free up some cash.
2. Consolidate your multiple debts into one:
You can’t enjoy a happy financial life without reducing your debt burden. The best way to do it is to consolidate your multiple debts into an affordable repayment plan, and that too at a low-interest rate.
Negotiate with your creditors to lower your interest rate on credit cards, personal loans, payday loans, utility bills, etc. If you’re not good at speaking logically, then you can sign up with any good debt consolidation company. They can help to reduce your debt burden by bringing your debts under a single repayment plan at a low-interest rate.
3. Create an effective budget plan:
You need money for both building an emergency fund and consolidating your debts. So, how will you get the money? Well, you can do it with an effective budget plan.
A good budget plan shows you the areas where you can generate free cash. It shows you the areas where you need to reduce expenses and free up some cash without increasing income. For instance, if you’re paying a huge amount for insurance premiums, then you can shop around for better insurance coverage at a lower premium rate.
Download any good budgeting app on your smartphone and start using it immediately. The app will help you to fulfill your saving goals automatically.
Just keep in mind that you have to allocate 10% of your monthly income towards your savings. This means you can allocate 90% of your income towards the other categories.
4. Contribute towards retirement savings:
How are you planning to spend your life after retirement? Do you intend to work even after retirement or do you plan to relax after quitting a job?
A financially responsible person would always work hard to build a robust emergency fund. The rule of thumb is to save 10% to 15% of your monthly income in the retirement savings fund.
Start saving in the retirement savings fund a little early. For instance, if you start working from the age of 24 years, then start contributing from that age only. The more you’ll save in the retirement savings fund, the more money you’ll have to enjoy in the golden period of your life.
Even if you earn less, then also you can lead a comfortable life after retirement. All you need to do is, contribute little money for 40 years. It’s as simple as that.
My dad’s wage was not that high when he was working. But he saved money sincerely every month in his retirement savings fund. Sure, he had to make a lot of sacrifices in his youth, but right now, he is leading a comfortable life after retirement. He used to contribute 30% of your income towards his retirement fund, and that was not an easy thing to do. We never saw money or luxury in our childhood. But now we understand, why dad didn’t enjoy in his youth.
Once you have started saving money in the emergency funds and retirement savings accounts, you should start creating more money for leading a debt-free life. Throw as much money as possible on your debts so that you can get rid of them quickly.
How will you increase your income? The first way to do it is to ask for a hike or get a new job. Ask your boss to give you a hike based on your performance. If your boss doesn’t agree, then search for a new job with a better paycheck.
If both are not possible right now, then work for an extra 10 hours per week at the rate of $10 per hour. You’ll earn around $400 per month before tax.