|
If you stick with your spending plan and keep applying the money you save
to reducing your debt, there will come a time when you have no debt. The
emotional burden that’s been weighing you down will be lifted. When you have
no debt or low levels of debt, you can really start making your money work for
you instead of against you. Instead of working to reduce your debt, you’ll be
working to build your net worth.
Some of these steps are for the future, but some can be part of your money plan
even if you’re just starting to work on your debt.
Start a savings account
Building a savings account for emergencies is the first place to start. If you look
back at the commitment you made on page 14, you’ll see that only half of the
money you found in your spending plan is going toward bigger payments on your
debt. The other half goes to build an emergency savings reserve. Set up an
arrangement with your bank to have this amount deducted from your paycheck
and added to a savings account. It’s important to move it out of your checking
account and into a savings account so that you aren’t tempted to dip into it for
regular monthly expenses.
As this account grows over time, you can use it as a reserve for those big unexpected
expenses that would otherwise push you back into debt—car and home repairs,
dental bills, taxes, and other surprises. And it will be your protection from
financial disaster if your income is ever interrupted. Make it a goal to build an
emergency fund that’s equal to three months of your current monthly expenses if
you’re in a two-earner household, or six months of expenses if you’re the only
wage-earner.
Once you’ve built a comfortable emergency fund, shift the monthly savings
amount back to debt reduction. Until you’ve eliminated your high-interest debt,
it doesn’t make sense to put too much money in a lower-interest savings account.
Start a retirement account
After your emergency savings account, retirement savings should probably be
your next priority. You may be able to get started on this, too, while you’re still
working down your debt. Tax laws are designed to encourage retirement savings.
If you’re not investing in an Individual Retirement Account (IRA) on your own or
a 401(k) retirement account through your employer, you’re missing out on one of
the best deals going. You put money into a retirement account before income
taxes are taken out of it, so a bigger chunk of your earnings goes into your account
to earn interest for your retirement. If you start investing when you’re young, even
modest contributions can turn into significant savings. If you put $100 a month
into a retirement account that earns interest or grows in value at a rate of 9 percent
a year, you’ll end up with roughly $20,000 in ten years, $65,000 in 20 years,
and $185,000 in 30 years. Because the money is taken out of your paycheck before
you get it, and because there are penalties for early withdrawal, retirement
accounts turn out to be the one savings method that really works for most people.
Save for your next big purchase instead of relying on debt spending
Before making a big purchase (a car or a major household appliance), figure out
what you can afford in monthly payments. Try making those payments into your
savings account for a few months before you buy. You’ll find out if you can handle
the monthly expense, and you’ll have a big down payment toward the purchase.
Better yet, delay your purchase for a few more months and pay in cash.
Buy insurance to protect your family’s finances
Insurance should be an important part of your financial plan. Without it, you
run the risk of facing huge expenses that could wipe out all of the gains you’ve so
patiently made. And you could leave yourself or those who depend on you in
financial ruin if something unforeseen were to happen. Here are some things to
consider when looking at insurance:
• Health care is extremely expensive and is the cause of many bankruptcies for
those without adequate insurance. Be sure you have health insurance that covers
unforeseen physical and mental health needs for you and your dependents.
• Life insurance protects your family from the loss of your income if you were to
die. Look for term life insurance (which is far less expensive than whole life
insurance) and buy enough coverage to pay for your funeral and to cover your
survivors’ living expenses for three to five years.
• Buy disability insurance. Statistically, we are more likely to become disabled
during our working careers than we are to die before we retire. And a disability
can be very costly to you and your family. Not only is your income reduced, but
you may incur higher medical and living costs, as well. Consider the percent
of your income (60 or 70 percent) that the policy will cover. But also look at how
it defines a disability. Some policies make it very difficult for a person to qualify
as disabled.
• Buy automobile, homeowner’s, and umbrella liability insurance appropriate to
your family’s situation ($100,000 per injury, $300,000 per accident, and $50,000
in property damage is the minimum automobile coverage most people should
consider). Don’t assume that the minimum required by your state or the most
basic policy offered will be enough for you.
Buy your own home
Buying your own home turns housing from an expense into an asset. Instead of
being at the mercy of rent increases over time, your costs will stay flat or decrease
as you pay down your mortgage. Mortgage interest and property taxes are tax
deductible, which makes the cost of home ownership more affordable. And if
property values increase, you’ll own a growing asset. | 
Disclaimer
