What should my husband and I do first and in what order? Should we pay off our car notes first, concentrate on college savings for our three children, or should we establish a six- to eight-month emergency fund? We’re confused because we’ve heard so many different opinions on how to prioritize our funds.
Paying down debt, educating the next generation, and creating a cushion for emergencies are all worthy efforts. With so many demands on the average American family it’s difficult to prioritize. Here’s how I’d go about it:
Although some personal finance solutions are a matter of opinion, almost all financial planners would counsel you and your husband to build an emergency fund first. Experts used to suggest a fund that would carry a family through six to eight months, but in today’s difficult job market, emergency money should cover your family’s living expenses for as long a period as it’s likely to take to find new employment.
Next, I’d recommend contributing at least 10% of your income to a retirement savings account. If you have extra money each month, feel free to start a college savings account for your children. However, your retirement savings takes priority–since your children can play a role in financing their own education with scholarships, grants, and loans.
The last item on your list should be to aggressively reduce the principals on your car loans. But unless you have the resources to do that and cover the rest of your priorities, paying the scheduled monthly payments is fine. For more help prioritizing your finances, consult the Black Enterprise Wealth for Life Principles.