Tuesday, 5 April 2016

Prioritizing Your Money

Save first or pay off debt?

A question that comes up time and time again is what you should be doing with any extra money you have, either in your monthly budget or from a one-time bonus. Do you save into your emergency fund first or pay off some debt? Today I'm going to set out what I think you should prioritize first and my reasoning behind it. 

Number one is probably the hardest, and most contentious, but I am taking the firm stance of paying off debt above everything else. Emergency funds are vital but if you are just starting out and have to make the choice I think it's best to get a jump on those high interest payments and put your money towards your debt. If tragedy strikes and you have an unexpected expense you may find yourself back where you started, either dipping into your newly funded emergency fund or charging it to your credit card. If you do have to use your card, you've at least saved a bit on the interest payments in the meantime. 

#1 Pay Down your Debt (the high-interest stuff)
I talk way more about paying down debt in this post, but you basically want to choose either the 'Ladder' or the 'Snowball' method and just keep on trucking. For our prioritization here I want you to focus on your high-interest debt, we're talking credit cards, unsecured lines of credit, etc. Don't worry about paying extra towards your mortgage, student loans or even low-interest car loans at this point. 

#2 Tackle that Emergency Fund
Once you've got all your high interest debts handled you're going to start putting that money towards your emergency fund. I like to use a no-fee, high interest savings account for this so you get a little interest but it is easy to access. PC Financial and Tangerine have good options. Building up your emergency fund will allow you to pay-off any expenses that creep up on you and not have to dip back into your credit cards. When unexpected expenses come up (because they will!) pay them, and then top-up your emergency fund as you can. You'll want to have about 3 months (at a minimum) of living expenses stashed away so you will have a bit of breathing room if you lose your job or your dog has to go in for emergency surgery (those vet bills are killer). 

Those first two are the biggies, and the ones that will cause you the most grief if you don't have them handled. The next points you have a little more freedom to mix and match, depending on your comfort level and priorities. Maybe you split your extra cash equally between the next four points, maybe you go with 50% towards retirement, 30% towards low-interest debt, and 10% to a big ticket item. My only stipulation, saving for retirement should be the biggest (or at least equal to the biggest) expenditure on the list. I know it's not flashy and fun or as satisfying as paying off a loan but being old and broke isn't what you want, and no, you aren't going to win the lottery. Deal? 

Work on that Low-Interest Debt
This will include paying off any outstanding car loans or increasing your mortgage payments. A lot of mortgages will allow you to increase your payments by a certain amount and also put down an annual lump sum. Take advantage of this, you don't need to do the whole amount but increasing your monthly (or even better, bi-weekly) payment by even 10% will cut down how long you'll be paying off the mortgage and how much interest you'll pay. The more debts you pay off in full the more monthly income will be freed up for other things. 

Save for Retirement
The younger you start the less you have to save thanks to the wonderful process of compounding interest. Investing even $100/month in your 20's will make a significant difference in the amount of money you will have in retirement. If you're jumping onto the bandwagon a little late you'll need to save more, no question about it, but the most important thing is getting started. 

RESP Contributions
If you don't have children you can skip this point but if you do you may want to factor RESP contributions into your monthly budget. If you want to set some money aside for your children(s) education, RESP's are a great way to get an additional benefit through the available government grants. More info here

Save for a Big Ticket Item
This could be anything from an annual vacation, to a new car, to a home reno but if you have something you want then start saving for it. And your emergency fund does not count for this! This shouldn't be your top priority but I'm giving you the A-Ok to put a portion of your monthly savings towards something in this category. Some people go into full gear retirement savings mode and aren't able to get out enjoy life in the present. I like to think balance, live decently well now and decently well later instead of poorly now and fantastic later ;) 

There you have it, once you get past steps one and two you will be able to create a workable budget outline to get you ahead of the game. There's also room for flexibility so if your priorities change (say you have a baby) you can change up your proportions or add amounts if you come into some moula. Happy saving! 

Save first or pay off debt?


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