My boy Eric hooked me up with a guest post today. He has a finance degree from the University of Colorado and an MBA from the University of Denver. He is currently a senior treasury analyst at a Fortune 500 company. He blogs about personal finance at Narrow Bridge and the Middle East at The Israel Situation.
It feels really good to kick debt in the face. In the last four years, I have bought a brand new, $17,000 car and taken on about $40,000 in student loans working on my MBA. Of the $57,000 in debt, less than $14,000 remains. I have a plan to be paid off completely in less than two years. I have managed to live below my means and kick debt in the face. However, beating the hell out of debt is only one part of the personal finance puzzle. It is also important to keep track of your finances and build up a safety net while paying down your debt. The two main savings methods that I am employing are investing in cash savings and investing in my retirement, but I had not been focusing on both of those as much as I should have until recently.
I have felt great about paying off my debt so quickly. Paying off a $90,000 MBA within two years of graduating is something anyone should be proud of, but I recently checked in on my savings account and realized I only have enough cash on hand to live for about 2 months, not the 3-4 that I should have saved. I am on track with my retirement savings, but that can always use a increase as well. Because of this, I have developed a two prong strategy to both kick debt in the face and kick yourself in the butt to start saving more.
Part I: Kicking Debt in the Face
You have probably heard of the debt snowball at some point if you are a regular on the personal finance blog circuit. If not, here is the low-down: Pay the minimum on all of your debts except for your highest interest debt, where you put every dollar you can. This is scientifically the fastest way to pay down your debt.
Part II: Kicking Yourself in the Butt
There is no big secret way to save money, you just have to set a plan and follow it. Sites like Mint.com and banking sites like SmartyPig can help you track your savings goals. You can also set up a separate savings account at your bank if you want a little extra barrier between your savings goal and your spending accounts.
The smartest way to save your money is to not have to think about saving it in the first place. The best way I know of to do this is to set up your direct deposit from work to deposit your paycheck into two accounts. A certain amount of money is designated to go to the savings account and the remainder goes into your checking account. Keep your savings account deposit going as long as you have to in order to reach your savings goal.
Increasing your retirement savings is also an easy, automated process. Most employers let you take money directly out of your paycheck to be deposited into a 401(k), Roth 401(k), or IRA account. Every time I get a raise, I increase my contribution to my retirement accounts by 1%. If you are not taking advantage of a 401(k) match from your employer, you are giving up free money! Set that contribution level right now. If you are already contributing to your retirement accounts, just increase your level by a percent or two to keep building your retirement accounts. If you are worried about locking the money away, try an automated investing plan at a brokerage that allows you to sell and withdraw your funds whenever you want without tax implications.
Whatever you do, just make sure you are saving for emergencies and your future, and while you are at it, make sure you are paying off your debt too.
Questions: How did you decide how much to save vs use to pay down debt? Do you use the automated saving methods above? Why is Ninja so freakin’ sexy?
Editors Note: My only beef with Eric is that he likes to Kick debt in the face, where I prefer the punching method. And yes, I added that last question, I’m pathetic.