Tuesday, 28 November 2017

So you've managed to get an influx of cash. Your first impulse might be to splurge on a wardrobe or book a vacation.

However, you might want to take a look at how the windfall can help your future self—by paying down credit card debt and building your savings. 

But which should you consider doing first? 

Financial guru and author Dave Ramsey says they both need to happen—as well as a few other things prioritized in this order.

The 7 Baby Steps

1. Amass at least a $1,000 savings cushion for small emergencies. To do that, he says, you can sell stuff that's been in storage or that you no longer need, pick up extra work, or find other creative ways to bring in cash. 

2. Pay off all debt except for your home. Start with the smallest one, regardless of interest rate. If there are two similar debt amounts, tackle the one with the highest interest rate. As each debt is eliminated, you have more cash to put toward the larger ones and you'll have the motivation to keep going. 

3. Save three to six months of living expenses. This will help you hedge against going back into debt should a financial emergency arise.

4. Put 15 percent of your income into retirement accounts. Start with any matching company 401(k) plans and Roth IRAs. 

5. Fund your children's college. Once your own debt is paid and you have money going toward your own retirement, start contributing to a 529 college savings account or an Educational Savings Account to get ready for those tuition bills. 

6. Pay off your home early. By contributing just a little extra, you can save tens of thousands of dollars down the road. 

7. Build wealth and give. As you're building wealth, be generous and leave an inheritance. 

Run the numbers

Another option is applying for a personal loan to consolidate debt. If you are interested in consolidating debt, here are some things to consider:

  • Will a debt consolidation loan provide lower rates, but extend the time to repay the loan beyond the original loans? 
  • Will it simplify your budgeting process? Ask a financial adviser whether having one lump payment per month vs. paying multiple bills separately will help you avoid late fees, improve your credit score, and simplify budgeting. 

Still confused? MyFico.com has a calculator that helps you do the math by figuring out the difference between the interest income you could have earned by investing and the interest expense you'd be paying on the cards. 

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