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Ambus Hunter

Millennial Financial Wellness Coach and Speaker

Debt, Save, or Invest – Where Should Your Money Go?

Debt, Save, or Invest – Where Should Your Money Go?

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When you are in the first half of your career, it can be tough knowing what to financially focus on. Between debt, trying to save for future desires like a home, and wanting to learn about investing, it’s easy to be left trying to figure out how much money should go where.

So, what’s the best approach? Well, this is what I will attempt to address:

  • The areas of your finances that are the most crucial
  • An efficient “order of precedence” of money priorities
  • Where to put your money, and when

Let’s check out a common scenario

When I was 29, I was six years into working for the Government and renting out someone’s basement. In addition to regular house bills, I owed about $12,000 on my car loan. I wanted to pay off my car, but I also wanted to continue to save, invest, and travel.

I was making pretty decent money, I just needed a clear plan in order to take care of business, but still live how I wanted.

This was my thought process and you can apply it however you see fit:

Your first step is to know what you’re working with

At 29, I wasn’t the focused budgeter I am now, but I did have a general idea of my cash flow.

If I were to ask you how much you make after taxes on a monthly basis, would you know without double checking? If not, it’s time to make a change and start knowing this info!

This clarity is necessary. You really can’t be efficient with your money until you know how much you have coming in each month, and how much HAS to go out.

Create a cashflow statement.

While this sounds fancy, it’s really pretty basic and something you can put on a notepad.

Simply put your monthly net income at the top, and beneath it, write out all of your monthly expenses.

The objective is to visually see what you have coming in and going out. This “cash flow” will also let you know pretty fast whether or not you are spending below, at, or above your means.

Once you have this clarity, start developing a budget.

The word “budget” is often met with a cringe, but honestly, it’s just a spending plan. The plan, will give your money direction each month so you are productive with it.

There are a bunch of different ways you can categorize, organize, and track your “spending plan”. I used Excel at first, but honestly, it doesn’t matter. Excel, pen/paper, an app, or a whiteboard, pick an approach and start!

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Are you current on your bills?

Once you have a visual of your cash flow, you should then do an assessment of your bill status.

Are you current on all of your bills? If not, do you know which ones you are behind on and how much you owe?

Make a list.

It can be as simple as writing down who you owe, and how much is needed to get back into “good standing”.

This is a crucial step to take so nothing gets shut off!

You need to keep a roof over your head, heat on in the winter, your lights on, and food in the fridge. If you have a car, you also need to make sure it’s not going to get repossessed.

In other words, you MUST make sure your absolute NEEDs are being met, and that you are current on your bills.

You also want to get current on your bills so no accounts slide into collections, which can kill your credit.

By the way, I am not talking about all forms of debt just yet, just the bills you are behind on payments.

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Shit happens, so you need to prepare for it

All of us experience emergencies.

At some point, something is going to happen out of the ordinary and it’s going to cost you money. That’s just life.

So, after you get current on your bills, it’s time to build a small cushion for emergencies.

For those that follow Dave Ramsey, this would be a $1,000 “baby” emergency fund.

Now personally, I have nothing negative to say about Dave and his program. His approach is perfect for his followers. Besides, he has helped millions, and I have not.

That said, I personally recommend building up the equivalent of one month’s worth of NECESSARY (non-discretionary) expenses in your savings account. For you, this is likely to be more than $1,000.

To arrive at this number, look at your spending plan and add up how much you pay in required bills for one month. Think rent, utilities, groceries, required monthly payments, and other stuff you HAVE to pay.

Since you already created a visual of what you got going out, this should be easy for you to figure out.

This one month of expenses is your first savings goal.

Turn it into a SMART goal so you’ll know exactly what you’ll need to do to reach the goal.

This goal will also shield you from quite a bit of unforeseen small fires. It won’t protect you from everything, but don’t worry, we will get to that.

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Start planting seeds for the future

You’ve shielded yourself from a short-term fire, which was an incremental step.

Now you need to take another incremental step for your future by planting seeds for retirement.

Here’s the thing, retirement is still a few decades down the road, but it will get here sooner than you think. Not to mention, you don’t want to miss out on the 8th Wonder of the World: Compound Growth/Interest.

To start investing, first take a look at your employer.

Does your employer offer a sponsored retirement system? If so, you NEED to prioritize contributing to it.

If you are getting a match, even better. That’s pretty much free money so you definitely don’t want to leave it on the table.

So, take a look at your spending plan, and see how much you can afford to put towards retirement.

If you are able to contribute enough to get the free match, without putting a financial strain on yourself, that’s what’s up!

If based on your spending plan, you don’t have the available cash to match your employer, you’ll need to do more digging as to why not. You may also need to tweak a few of those unnecessary expenses to free up some money.

Maybe that means you cut the streaming services, or only eat out half as much. In some cases, it might just mean you need to try to make more money.

Either way, the answers can be found in your cash flow statement and spending plan.

What did I do? Well, my employer offered a 5% match, so I made sure I was able to meet that.

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Your debt won’t go anywhere until you get intentional about getting rid of it

If you let it, debt will loom over your head for years and years.

Now while all debt is debt, some types are more “problematic” than others.

The most troublesome? High-interest debt.

Credit cards, many student loans, and definitely some personal and auto loans can be high-interest. By the way, I’m considering high-interest debt to be anything above 2-6%.

Credit cards, for example, have an average interest rate of 15% for existing customers. If you are carrying a balance, you are giving away too much money.

Auto loans are around 6% on average, for a 60 month term.

While mine was less than 2%, and not considered “high-interest”, I still wanted it out of my life.

Was that smart? Well, one could definitely make the argument that 2% interest wasn’t that big of a deal. I could have put those extra payments in the stock market and yielded closer to 8%.

Despite that mathematical fact, I wanted the emotional relief of being consumer debt-free. So, I prioritized paying it off as quick as possible. I ended up paying my five-year auto loan off in three years.

How did I do it? I created a SMART goal, and I worked the monthly figure I needed to put towards the debt, into my monthly spending plan.

Had I had more than one form of debt, I would have put it into a debt snowball approach.

That’s how you get intentional about your debt.

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Want to have great sleep? Stack an emergency fund

Once I got my consumer debt out of the way, I could then re-focus on saving for emergencies.

That starter emergency fund from earlier was for the small fires. Now it’s time to protect against the big fires.

Work to save a three to six-month emergency fund at MINIMUM. I say that because I am more of a fan of the 10-12-month emergency fund.

While that might seem excessive, do you know how good it feels to know you could handle any auto, home, and most medical emergencies without it destroying your life?

Wouldn’t you love to know what it feels like to be able to leave your job without worrying about making ends meet? This is where that deep emergency fund comes in.

Trust me, this move will help you sleep so well.

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Now onto the fun part

Ok, let’s review. So far, we have discussed:

  • Developing a spending plan
  • Checking your bill status
  • Initiating a starter emergency fund
  • Contributing to your retirement
  • Planning your way out of debt
  • Stacking your emergency fund

By this point you should have clarity in your financial picture, are current on today’s obligations, have prioritized protecting your future, and you have a roadmap to clean up the past.

You have a plan!

Now onto the fun part: deciding what you want to do next.

What gives you energy in life? What are your passions? Hobbies? Interests?

Do you want to do more investing above and beyond your employer-sponsored account? That could be a good idea as well.

Once you’ve taken care of business, you now can determine your moves based on what you value. In other words, you have options.

How much do you have to spend on said options? Well, that comes back to your spending plan.

Your spending plan is a living and breathing document, and you’ll constantly have to tweak it based on your current goals, values, and priorities.

The same year I paid off my car, I also bought additional investments. But you know what else I did? I went to Italy for a vacation.

I had the extra cash to put towards both investing and Italy because I got clarity in my financial situation, and took care of business.

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Final Thoughts

You know, I did my best to outline the process I followed on what I call the “financial order of precedence”. But that said, there’s SO many nuances.

Your life, and the specifics of your situation, may call for tweaks to this “guideline”. And to be honest, that should be the case!

Personal finance is indeed personal. So, take this “guide” as a just that, a guide. Apply it as it makes sense to you.

If you want more examples of how you can reach your financial goals around your values, I share weekly insights via my weekly newsletter.

Insights, tips, money lessons from those I know, and other information you could use to help strengthen your relationship with money.

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