Multiple Priorities

[Sunshine&Smiles]

Do you have any suggestions for balancing multiple savings priorities?

I am trying to build an emergency fund, save for retirement, and pay off a small amount of credit card debt. Is it better to split my extra resources three ways or focus on one goal at a time? I am not sure if my age matters, but I am 24.

Right now I work sixty hours a week at minimum wage (two part time jobs at 30 hours each). I make about $1500 a month after taxes.

Here are my monthly expenses: ($1000/ month)

Rent $300 (I have three roommates, so that helps)
Food $160
Credit Card $50 (My minimum payment is $38)
Health Insurance $60
Internet $20
Car Insurance $70
Cell phone $40
Donations $150
Gas $100
Unexpected/ Misc. $50

This leaves me about $500 a month for my other goals/priorities. How should I divide that leftover money?

Here are my assets and liabilities:

Credit Card Balance $730 at 13% interest
Emergency Fund $2500
Roth IRA $8000 (I do not have any 401K plan through either job)

I own my car outright and I do not have any student loans. My health insurance deductible is extremely high at $5000, so the small size of my emergency fund makes me very nervous. I do not have insurance through work and the premiums are too high for lower deductible plans. Ideally I would someday like to have $17000 in an emergency fund to cover a year’s worth of expenses plus my insurance deductible. I am afraid to take money from my emergency fund to pay off my credit card before I have at least enough to cover my deductible.

Should I focus solely on my emergency fund before saving more for retirement? Should I split my extra funds evenly between goals? I seem to be making such slow progress and would welcome any suggestions.

Thank you so much for any help that you have to offer. I am sorry it is such a long post.

[neatdesign]

First of all, good for you! I wish I had as much forethought as you do when I was your age. I think it's great that you're starting to sort this stuff out while you're still young -- you'll thank yourself later, trust me.

According to the numbers you listed, you have $500/month in extra funds. But you didn't list a lot of spending categories that you probably do spend money on each month -- you didn't list any utilities (electric/water, etc), gas for your car, taxes (do you pay property taxes for your car?), gifts, entertainment, clothes, car maintenance, eating out, etc.

However, let's assume that you DO have $500/month to use any way you want. In that scenario, I recommend paying off your credit card debt. Just get rid of it. That way it's not hanging over your head anymore.

Once the credit card is paid off, this is how I would divvy up the $500/month extra funds:

Put $100/month into retirement savings. At just 24, you have time on your side. You can always increase the amount you contribute in a few years, but even saving $100/month now will result in significant savings over the next 40 years before you actually retire.

Put the remaining $400/month towards your emergency fund. But that's not all: I also suggest redirecting the $150/month you spend on donations toward your emergency fund. With your health insurance deductible being a whopping $5,000, you're not really in a financial position to give away 10% of your monthly income. You're just one injury or serious illness away from being in dire financial straits.

If you put this $550/month towards your emergency fund, then in 12 months your emergency fund will be $9,100. In 18 months, you'll have $12,400. And in just 30 months, you'll have reached your $17,000 goal!

So, those are my two cents. Whatever path you choose, good luck!

[scfr]

1. Agree that you pay off the cc debt ASAP. Kiss that 13% interest goodbye!

2. Next, I recommend that you research HSAs (Health Savings Accounts). Check to see if you are eligible for one and if it makes sense for you. What an HSA does is allow you to save money pre-tax for medical expenses. This would be a tax-advantaged way for you to save up at least enough to cover that deductible ... more if you wanted to. You can use the HSA money for any qualified medical, dental, or vision expenses, and it's money that you did not pay tax on.

When you reach retirement age, money still unused in your HSA can be used similarly to the money in an IRA. So, in a sense, an HSA is sort of a hybrid Emergency Fund / Retirement Savings. That means you can work towards two goals with one savings vehicle. Whether or not you have money left in your HSA at retirement age will probably depend on how long you have a high deductible plan. If you move to a job in a couple years where you have a lower deductible, you'll probably use up all the HSA funds. But if you have a high deductible for a very long time, you may have money left over.

Before setting up an HSA, you will definitely want to put in some time researching it, to make sure you understand the rules.

[Bob B.]

Agreed. Pay of CC first. 13% return on investment. And, yes, look into an HSA. $100 to retirement per mo. after CC is probably where you want to be for now. Is there any way you can transfer you 60 hrs. per week to one better paying job with benefits?

[Sunshine&Smiles]

Thank you to everyone for taking the time to help me! I really appreciate it so much!

According to the numbers you listed, you have $500/month in extra funds. But you didn't list a lot of spending categories that you probably do spend money on each month -- you didn't list any utilities (electric/water, etc), gas for your car, taxes (do you pay property taxes for your car?), gifts, entertainment, clothes, car maintenance, eating out, etc.

All utilities, except my share of the internet, are included in my rent, thankfully. I do owe property taxes on my car each year; I forgot about that in my budget since it is a once a year payment. Thank you for reminding me! This past year my property tax was $68, so it would average out to about $6 each month.

If I spend anything on gifts or fun activities, it has always come out of my misc. category and my eating out is in my food budget. I don't eat out very often, maybe just go to the local pizza place once a month. Right now, I budget $100 a month for gas for my car, although I don't always spend that much since the price fluctuates a bit. You made a very good point that maybe I should try to break down my budget into even more specific categories. Thank you!

I think maybe I will attack my credit card first, before my emergency fund. It would just take me two months longer to build my fund then and no more interest!

[Sunshine&Smiles]

1. I recommend that you research HSAs (Health Savings Accounts). Check to see if you are eligible for one and if it makes sense for you. What an HSA does is allow you to save money pre-tax for medical expenses. This would be a tax-advantaged way for you to save up at least enough to cover that deductible ... more if you wanted to. You can use the HSA money for any qualified medical, dental, or vision expenses, and it's money that you did not pay tax on.

This is extremely helpful! Thank you! I had never heard of a HSA before, but I think this will be a wonderful option. I will definitely do a bit of research on this.

Thank you!

[~bs]

pay off the credit card.

[bjl584]

You should focus all attention to the cc first. You can have it paid off in less than 2 months.

Then I would split my efforts between building the EF up to around 6K and funding your Roth.

[EEinNJ]

For your income level, $150/month for donations seems too high. Is this a church tithe thing?
I second paying off the CC debt. Don't "donate" money to them.