How to strike a Balance Between Debt, Saving, and Investing

Student loans, credit cards, and mortgages. You, like many other people, may have a variety of debts. And, like many people, you may be attempting to pay off your debts while also saving for a rainy day (not to mention retirement).

Trying to balance so many competing priorities can be stressful, especially if you’re not sure where to direct your attention. As a result, we’ve put together this step-by-step guide to help you decide what to tackle first.

Complete all of your minimum payments.
This could almost be «Step 0,» because it should go without saying: Always pay the minimum amount due on all debts on time. It is critical to keep your debts in good standing in order to protect your credit score. Furthermore, missed payments can result in late fees and compounding interest charges, causing debts to quickly spiral out of control (and in extreme cases even lead to bankruptcy).

Create a cash buffer.
Once you’ve met your minimum obligations, it’s time to start saving. We recommend starting with a $1,000 cash buffer or one month’s rent, whichever is greater, to give you some breathing room in your day-to-day (fully funding your emergency savings will come later, after you’ve checked off a few other boxes).

Obtain the entire employer match
Then, look around for any low-hanging financial fruit. That means attempting to contribute enough to your 401(k) or other workplace retirement plan to receive the full amount of any matching funds provided by your employer.

Clear any credit card debt
If you’ve been carrying credit card balances, now is the time to start reducing them by paying more than your monthly minimums. Eliminating this debt is critical to avoiding becoming trapped on a high-interest treadmill.

What if you have a balance on more than one credit card? In that case, prioritize paying off your highest-interest card first, then the second highest, and so on. (Once those cards are paid off, begin paying your balance in full every month.)

Completely fund your emergency savings
Following that is your rainy-day fund, also known as your emergency savings. For this step, aim to save at least 3 to 6 months’ worth of essential expenses, and keep those savings in cash so you can easily access them if necessary.

Although it may seem like a lot of money to keep in cash, remember that this money is your safety net, keeping you from having to rely on credit cards in the event of a job loss, medical emergency, or other life curveball.

Consider investing versus debt reduction
The good news is that you now have many of your most pressing financial needs met, allowing you to move down your priority list. The bad news is that this is where your decisions may become more complicated.

If you still have debt, whether it’s student loans, an auto loan, or a home equity or mortgage loan, compare the interest rate to our 6% rule. This can help you decide whether your next step should be to pay more than the minimum on your remaining debts or to invest additional (unmatched) dollars toward retirement.