After subtracting your living and personal expenses from your monthly income, how much is left? Ideally, this is cash you will put toward financial goals. These might include:
Paying down debt. If you have high-interest credit card debt or student loans, paying these off should be a top priority. The longer you delay, the more your interest expense will snowball. To get you started, here is a guide to paying down debt once and for all.
Setting up an emergency fund. I recommend keeping three to six months of living expenses in a savings account separate from your checking. If your car breaks down or you're in between jobs, this emergency fund will save you you from dipping into retirement savings or taking out a loan. For more details, check out my complete guide to setting up an emergency fund.
Contributing to a retirement account. If your employer deducts 401(k) or IRA contributions from your paycheck, this is where you’ll categorize them. These retirement plans offer an array of tax benefits and typically include an employer match of up to 3-5% of your salary. To avoid leaving money on the table, try to contribute at least as much as your employer will match.
Start investing. If you’re debt free, have an emergency fund, and contribute to a retirement plan, then it sounds like you’re in great financial shape! To take things to the next level, start investing your excess cash. Interest rates on savings accounts are 1% or less, which isn't too compelling. However, you can boost your long-term returns by investing in the stock market. Note that this is a risky short-term strategy because the markets fluctuate daily. However, if you have some cash that you don’t plan to withdraw for decades, the stock market is a great option. I don’t have the time or desire to pick stocks and manage a portfolio, so I use Wealthfront to do it for me. You can get your first $5,000 managed for free by signing up with this link.