Dear N.,
Congratulations on being debt-free! Your world is filled with nothing but possibility.
I was you once. I paid off all my business, credit card and undergraduate debt, rejoiced for but a moment, and then turned around and took out a car note. We all make our choices. Don’t make the same one I did!
The trouble with possibilities is that it’s easy to start disbursing money into so many different buckets: savings, other savings, a rainy day fund, a house fund and so on. If you try to divide and conquer too much, you’re not going to conquer anything. Those small achievements for each of your goals could actually leave you feeling disheartened instead of empowered.
For your best next step, I turned to Jen Smith, a fellow writer at The Penny Hoarder who paid off $78,000 of debt with her husband in two years. Smith is my savings role model.
Smith recommends starting your debt-free life by first saving three to six months of expenses in a high-yield savings account, and then making sure 15% of your income goes toward retirement. “Fifteen percent isn’t a hard-and-fast rule,” she said, “but if you want to retire on time, then prioritizing it is essential. Then, any extra can go toward saving for a house.”
Since you’re already saving, you can probably skip ahead to focusing on your retirement accounts. Smith is a fan of contributing to your company-sponsored 401(k) up to the offered match. Then it’s time to open a Roth IRA if your income permits.
“Roth IRAs are great because you have full control over the investments, and the contribution limits are reasonable enough to be able to max it out,” she explained. (The contribution limit for 2019 is $6,000; if you’re 50 or older, you can contribute an extra $1,000.)
If you still aren’t setting aside that full 15 %, go back to your 401(k) or HSA and contribute more to one of those. If you’re not catching the drift, your priority should be to stash as much money as you can for retirement now, before a house or kids enter the picture.
But while you’re making these plans, don’t forget to pat yourself on the back. The progress you’ve made is noble and worth celebrating. Smith and I salute you!
Have a tricky money question? Write to Dear Penny and you might see your question answered in an upcoming column.
Lisa Rowan is senior writer at The Penny Hoarder, and the voice behind Dear Penny.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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