Financial Adulting. Ashley Feinstein Gerstley

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      Priority #3: High-Interest Credit Card Debt

      Credit cards come with interest rates that are often as high as 15–30%. Holding a balance on your credit cards costs you money in interest. If you make $100 monthly payments on a credit card with a $5,000 balance and an interest rate of 20%, you'd pay the card off in nine years and pay $5,840 in interest. Yikes! This is not to depress you or make you feel guilty, just to show that this is why paying off high-interest credit cards should be high on your priority list.

      Priority #4: Retirement (a.k.a. work becoming optional)

      We'll be talking a lot about retirement (in Chapter 7) but this means saving up enough money so you don't have to work. It's really important because other than credit cards (which are way too expensive), saving (but really investing) is the only real way to fund your retirement. Also, retirement accounts are tax-advantaged so it's a win–win.

      Everything Else

      By everything else I mean deciding between paying off student loans, investing outside of retirement accounts, saving for a home, and everything in between. Here it's a matter of balancing what makes the most sense financially with what's important to you.

      What makes the most sense financially typically depends on interest rates, both the interest rates you're paying for debt and the interest rates you would earn by investing the money. Interest rates on student loans vary widely but it's typically recommended that if the interest rate on your student loans is 7% or more, it makes sense to prioritize paying those down before investing outside of retirement accounts (which have added tax benefits).

While these are great guidelines, you can't ever be sure what your investments in real estate or the stock market will earn during the years you decide to invest and not pay down your debt. It's always important to keep your motivation in mind. If your student loans don't bother you, and you're really excited to get started investing, you might decide to allocate funds 50/50. It doesn't have to be all or nothing.

      Add a priority ranking to each goal, starting with #1 (top priority) and working your way down.

Goals	Priority
Example: Build minimum rainy-day fund	#1

Make Sure Your Goals Are SMART Goals

      Smart goals are:

      Specific: Describe the goal.

      Measurable: With money goals, this is the amount.

      Attainable: Is it possible? Is the outcome in your control?

      Relevant: Is it worthwhile? Are you willing and motivated to put in the work to achieve it?

      Time-Bound: By when you will achieve it.

      “Save more money” turns into “I'll save $3,000 toward my rainy-day fund this year by saving $250 per month.”

      Go ahead and rewrite all of your goals as SMART goals here. Write them in order of priority, starting with priority #1.

      1 

      2 

      3 

      4 

      5 

How Much Is Enough?

      As you get specific with your goals, you might not be sure how much is enough. Here's how to figure out how much is enough for some common money goals.

      How Much Do I Need in My Rainy-Day Fund?

      The typical recommendation is to have three to six months of expenses saved for an emergency. The idea is that if you lose your job, you have some time to find a new one or if someone in your family gets sick, you can take time off to take care of them.

      Think through a couple of emergency situations – fun, I know. How many months of living expenses would you like to have covered? Depending on your specific job and industry, it might take more or less time for you to find a new role if you lost your job. It's also important to take your health insurance coverage into account. If something happened, what is the maximum you'd have to pay out of pocket? If you aren't sure, don't fret. We talk about this in detail in Chapter 10.

      Instead of using your typical spending to calculate your rainy-day fund, you might decide to only cover your necessities like bills and some food. Multiply the number of months by your estimated monthly spending. You might decide that at a minimum you'd like three months saved but ideally you'd like to have six months saved. You can break that into two separate goals.

      How much do you want in your rainy-day fund?

# of Months	×	Monthly Spend	=	Rainy-Day Fund
Example: 3 months	×	$3,000	=	$9,000
	×		=

      HOW DO I USE MY RAINY-DAY FUND?

      We talk a lot about building up our rainy-day funds, but we don't talk enough about actually using them when we need them. Once you've built the habit of saving every paycheck, it can feel painful and even unnatural to use the money set aside. People who've retired report a similar feeling when depleting rather than building their retirement money. But that's what it's there for!

      To make this easier on ourselves, we should be very clear from the start about when we'll use the money in our rainy-day fund (probably the scenarios that you walked through in the previous exercise). What constitutes an emergency?

      If a situation arises where it makes sense to use your rainy-day fund, make the conscious choice to use it. Transfer a month's worth of expenses to your checking account instead of transferring money over every time you need it (like a slow painful drip). This feels a lot more powerful and less agonizing. Once your situation changes, you can work to build it back up.

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