Are You Financially Healthy? The 3 Numbers You Should Know
Take Action: Increase Your Contributions
“Truly, the hardest part is just getting started,” says Kirkpatrick. If you’ve been dragging your feet until now—whether it’s synching with HR about your 401(k) benefits or setting up automatic contributions to your Roth IRA—make it part of your New Year’s resolution to take that first step.
And while everyone’s retirement savings plan and goals will be unique, you can still start with some general must-dos. First, make sure you’re socking away a minimum of 1% of your annual income, Kirkpatrick directs. And, if your company offers a 401(k) match, “Absolutely do whatever it takes to get the full match available,” she says. “Never leave free money on the table.”
Another way to rock that retirement account? Schedule increases of 1% to your retirement savings every six months. If your retirement plan doesn’t provide an option for automatic increases upon signing up, you can set yourself a calendar reminder to log into your account and do it manually.
The first thing to know is that not all debts are considered equal. Maybe you have some student loan debt: That’s the first type, called good (or “healthy”) debt, and it includes loans taken to invest in yourself or in something that’s expected to be worth more in the future. Mortgages also fall in this category, Kirkpatrick explains. The other type of debt, considered “bad debt,” doesn’t help you invest in your future—think credit card debt or payday loans. They also typically have higher interest rates.
We know that tallying up your total debt can be terrifying—looking at this total isn’t our idea of fun, either! But if you don’t do it, you may never have a plan to pay it back. One easy way to get a handle on your debt is to link up any of your accounts with outstanding balances to your LearnVest.com account. Think: your mortgage, car loan, student loans or credit card debt. Then consider the below strategies to help you start paying them down quicker.
RELATED: Top Debt Mistakes to Avoid
Step 1: ‘Rack and Stack’
Now it’s time to determine which debts to pay off first. You should always be making minimum payments across the board, but when it comes to allocating the bulk of your money, Kirkpatrick recommends a method called “racking and stacking”—making a list of every loan you have, ranking them in order of highest to lowest interest rate and prioritizing the highest-interest loan first.
Once you’ve managed to clear the most toxic type of debt out of the way, move down the list according to interest rate. By paying the most toward one priority debt at a time, you’ll get the most expensive debt out of the way sooner, and should save a bundle on interest.
When racking, note that if you carry a balance on a credit card with 0% interest, it doesn’t necessarily belong at the bottom of the list. In fact, it should be one of your top priorities. “0% credit cards tend to have sneaky features,” Kirkpatrick says. “If you’re carrying a balance, you could get hit with deferred accrued interest if you haven’t paid it off when that 0% interest period ends.”
Step 2: Explore Repayment Options
Grads with student loans are automatically enrolled in a standard payment plan; most homeowners settle into 30-year fixed mortgages. And this very well could be the best financial choice for you—but have you ever considered that you might be better off with a different plan?
“Look at each loan and see if there’s a way to attack debt more quickly by changing your payment plan,” says Kirkpatrick. That might mean a graduated payment plan for your student loans or maybe even refinancing your mortgage, as long as you’re still able to pay it off in the same time frame. Even if you’re unsure of the changes that would suit you best, it never hurts to call your lender and ask.