You’re a college graduate, yet somewhere between COM 311 and BIO 102 there was never a class that taught you basic money management skills. Fortunately, you don’t need a whole semester to learn how to become a savings master. Follow five easy steps to slash your debt and build a respectable savings account.
Step One: Build an Emergency Fund
Assuming you land a full-time job right out of college, your first budgetary task should be to build up a savings account for an emergency fund. This fund will serve as a safety net for several scenarios:
- Sudden loss of income (you lose your job)
- Medical emergency
- Emergency travel (attending a funeral or ill family member)
This fund should be at least $1,000, but ideally it would equal one to three months of your annual salary. However, even if you want to build your fund past $1,000, you should move on to step two when you hit that number.
Step Two: Clear Out Revolving Debt
It doesn’t matter how well you save if there is debt looming over your finances. If you graduated with a balance on a revolving account, such as a credit card, the interest rates are likely higher than any high-yield savings or money market accounts where you keep your savings. You need to get credit card debt out of your life.
Paying off debt is a mental game, so it’s important to start paying down the credit card with the lowest balance first — this is known as the snowball method. Pay as much as you can on the lowest balance while contributing the minimum payment to the other credit cards. When the first card is completely paid off, “snowball” your payment into the next card and keep going.
Step Three: Start Investing for Retirement Now
The best time to plant a tree is 20 years ago, and the second best time is today. It’s never too early or too late to start saving for retirement. If your employer offers a 401(k) match, then you should take the match. But if you’re saving for retirement on your own, you should start a Roth IRA.
A Roth IRA is very similar to a traditional IRA except the money you contribute is already taxed at the beginning and grows tax-free in your account. When you withdraw that money at age 65, there are no extra taxes or fees to pay. This makes a Roth IRA an appealing option for middle class savers.
Step Four: Tackle Bigger Debt
Now that you have the beginnings of an emergency fund, no credit card debt and started your own Roth IRA, it’s time to start tackling bigger expenses before moving on to more advanced savings. If you have a car payment, student loans (under $15,000) or other high-balance loan, it’s time to use the snowball method to pay these down as well.
This step requires lots of patience as it won’t happen nearly as fast as steps 1-3, and will require sacrifice to make it happen in a reasonable time. But if you’re serious about saving, it will all be worth it.
Step Five: The Emergency Fund — Round Two
Congratulations, you’re now relatively debt-free, with the exception of maybe some student loans and a mortgage if you purchased a home. But that’s OK, because now you’re ready to build up that emergency fund into something serious.
The ideal emergency fund — one that can protect you from the worst of circumstances — should be three to six months of annual income. If you can do that, you’ve reached the rank of savings master.
Bonus: Extra Income Opportunities
Savings is always easier said than done, especially when you struggle with income. But there are always ways to pad your paycheck if the 9-5 isn’t paying what you’d hope. Network marketing companies like Amway are great if you’re ambitious and love talking to new people. If you write, design or shoot video, there are tons of freelancing opportunities available.
