The best way to narrow this down is to examine your debt and separate your good debt from the bad debt. You ask, is there such a thing? It is almost always a good idea to get rid of credit cards and other high interest loans before you set aside cash.
However, it is paramount not to accelerate payments on your mortgage or student loans at the expense of increasing your savings or retirement. This is what we call good debt. We will examine more on this later.
If your have high interest credit card debt, pay this off first. It does not make sense to keep paying high interest rate and try to save pennies at the same time. You would have to make more than 20% after tax-return on stocks, bonds, or mutual funds to make them a better investment than paying off credit card debt.
There is one exception to this. If your employer offers a 401k plan and matches your contribution, fund it up to that level, even if you have credit card debt. This is because you are getting a 100% return on your investment.
Do not be in a rush to pay off your mortgage or your student loans. Uncle Sam refunds part of your interest payment when you itemize your deductions on your tax return. Use your money instead to invest in liquid assists and savings.
Do not be in a rush to pay off your student loans. Qualify interest on student loans can be written off no matter how long it takes to pay off your loans.
Thanks to recent legislation, you can now shop around for the best term. Lenders may offer a rate reduction if you choose to have your loan payment atomatically deducted from your bank account.
Some lenders will knock off some rate after 24 or 36 months of on-time payments. Also, you can often save quite a bunch of money by looking into consolidation of your loans, which is also a good idea.
Try to set aside enough money to tide you over for three months if your job suddenly stops. If you have less-than-steady income, such as from a commissioned sales position, a job that has exposure to economic fluctuations, you definitely need a six month cushion set aside for income.
It is best to put it away in a high-yield savings account or money market fund on a monthly basis until you reach the amount you need.
