I see the risk level in the stock market continue to rise and now advise that it’s best not to invest in stocks heavily for the time being. For now, the allocation with the best probability of success is to invest between 0 and 20% of your money in stocks, depending on your risk tolerance.
The truth is most people already know how to eliminate debt, but lack the motivation to begin this intimidating process. Eliminating debt isn’t about knowing how; it’s about being motivated enough to make it happen.
In my book about managing your money, Money Smart, I write about maximizing your money to its full potential. Here are 7 key steps from the book to change the way you think about spending your money to help you make your current income level work. Each one individually has the potential to make a big difference, and together they can transform your personal finances.
Expect the unexpected. Saving for an emergency fund is one of the smartest things anyone can do, even before debt reduction.
Everyone wants to be both debt-free and financially secure, but how do you prioritize the two? Is it best to hold-off with aggressive saving until you are debt-free? Or is having a savings cushion more important than getting rid of debt? It’s critical to pay down your debt, but it’s critical to create a plan that will build your bank accounts as well. To be smart about accomplishing both goals, you need to carefully prioritize your saving and debt-reduction efforts. Unless you have a very good reason not to, I recommend that you adhere to the following priority sequence:
1. Stop using credit cards and pay only the minimum payments until step four is reached.
2. Aggressively save for an emergency fund starting with at least one month’s expenses. This will create a cash cushion for emergencies rather than needing to pull out the credit card.
3. If an employer will match contributions to the company 401(k) plan, save the amount necessary to get the full matching dollars.
4. Allocate 50% of savings to an emergency fund, and 50% to debt reduction until four to six months’ of living expenses are covered in the emergency fund; four months for a two-income family, six months for one income.
5. Now focus on eliminating all debt except for home and car loans.
6. Build up annual savings until the maximum tax-deferred savings allowed by IRS guidelines is reached. Once you reach this point and are saving as much as you can pre-tax, throw a party and reward yourself with something very special. You’ve earned it!
7. Pay off any car loans, then start saving $250 a month in a new car fund.
8. Increase saving to at least 15% of pre-tax income. Save for home ownership If not currently in a home. Homeowners should also accelerate mortgage payments and continue until it is paid off. Also, during times when fixed-interest rates such as CDs have fallen below 3.5%, be aware that making extra mortgage payments provide a better after-tax return on your money.
9. Families with children might want to start a specific education fund based on the child’s abilities, needs and desires. (Please read “Paying for an Education” in chapter eight of Money Smart to see if this is something you should do.)
Small monthly changes can have a huge impact on savings and debt reduction, especially when you follow the right sequence. Be smart in setting your priorities and your Spending and Saving Plan will put you on the path to financial freedom in no time
For many American’s debt seems like a way of life. For over fifty years the relentless message that debt is “normal” and “acceptable” has brainwashed the public to believe that to achieve the American Dream it’s okay to go into debt. Nothing could be further from the truth. These have been tough times for many hard-working Americans who still unfortunately believe they must borrow to live. But let me be clear, you absolutely must live within your means to succeed financially and to insure a good quality of life –there is just no way around it.
Most who have a debt problem falsely believe that something will happen in the future to solve it and all will be well. A common assumption is that income will grow faster than spending, but that is very seldom the case. Even those that end up making more are by then usually well conditioned to just keep spending more, and end up going deeper into debt.
Debt reduction and eventual debt elimination are very achievable goals. My debt elimination plan has three key elements: attitude, action, and persistence. Of course it can feel overwhelming to start a debt reduction plan, but once a plan is in place and early efforts begin to turn out results, momentum and the feeling of success build. Not only will debt be eliminated; the money that is saved will reduce stress, increase enjoyment of daily life and create financial stability. When does debt elimination begin? Today! Start today with these steps:
Getting out of debt is a very achievable goal. Over a million people do it every year, and this is the moment to add your name to the list. Eliminating a sizeable amount of debt takes time and discipline but whatever temporary sacrifices you make will be well worth it for a better tomorrow.
