If you want to find out how to take care of you personal finances, check these 6 steps that will help you keep on track.

Step 0: Budget and reduce costs, set realistic goals

Knowing where your money is going is the foundation of a solid financial foundation. A budget helps you identify your sources of income minus your expenses. You should keep your expenses as low as possible. Housing costs, utility bills, and necessities are harder to eliminate than spending on “entertainment,” eating out, or clothing.

Free online tools and spreadsheets, such as those on the wiki tools page, can help you track your spending.

Once you determine your budget, you need to figure out what your goals are. A secure retirement? buy house? Saving money to buy a car? We’ll get into the details of saving these points later.

Step 1: Build an emergency fund

An emergency fund should be relatively liquid money that you won’t touch unless something unexpected happens. Unexpected travel, replacing essential equipment, and unexpected medical procedures are all user-submitted examples of using emergency funds. If you need to tap into your emergency fund at any time, your first priority should be to replenish it once you get back to normal. Treat your emergency fund right and it will reward you.

How should I adjust my emergency fund?

For most people, 3 to 6 months of expenses is enough. If your income is fluctuating or uncertain, a larger emergency fund (e.g., 9 to 12 months) may be needed.

What if I have credit card debt?

Credit card interest rates are often very high (typically 15-25% APR), which is quite a problem. If this applies to you, you should prioritize paying off your debt first.

A smaller emergency fund of $1,000 (or a month’s worth of expenses) may be acceptable for now while you pay off credit card debt or other debt with interest rates above 10%. For more information, see Determining the Size of Your Emergency Fund.

In which account should I put my emergency fund?

Generally speaking, emergency funds should be kept in safe investments that can be converted into cash quickly. FDIC-insured savings or checking accounts are the most common options. CDs and I Bonds are available, but I Bonds are only available for emergency savings after the initial 12-month lock-in period. Some CDs may also require you to pay an early withdrawal penalty. If you redeem an I bond before five years, you will lose the last three months of interest. Things you should never use include stocks, credit cards, HELOCs, or anything that fluctuates in value or can be taken away without warning (like a line of credit). See the emergency fund wiki section for more information.

Step 2: Employer-Sponsored Matching Funds

Once you’ve established your emergency fund, the next step is to make sure you contribute enough to your employer-sponsored retirement plan (if you have one) to get matching funds from your employer, if they offer it. The reason you do this before paying off high-interest debt is because employer matching funds provide a risk-free, guaranteed return on your investment at a (usually) higher interest rate than your debt. This step applies to any employer-sponsored account with employer contributions or matching contributions (with the exception of certain 401(k) plans, this step applies to all SIMPLE IRAs, certain 403(b) plans, certain 457 plans, and certain Thrift plans) planned savings plan).

For example, if your employer provides a 50% match on the first 6% of your health insurance (401(k)) contributions, you’ll need to make sure you contribute 6% of your salary to receive the full benefit of the match. The immediate return on investment reaches 50%, which is already very good! Note that 401(k) contributions must come from payroll deductions. So if you have a sum of money and want to benefit from the subsidy, you will need to increase your contribution rate from your salary and spend your sum of money.

What happens if my employer isn’t a good fit for me or I don’t have an employer-sponsored plan?

Skip step 2 and go to step 3.

What happens if my employer contributes to the account on my behalf, regardless of whether I contribute or not?

You are lucky. Open an account, make sure you get a match, and proceed to step 3.

What if I am self-employed?

If you’re self-employed, you can also make your own employer contributions to your 401(k) or SIMPLE IRA, but you should do this in Step 5.

Step 3: Pay off high-interest debt

After you determine that you are taking advantage of employer benefits, consider using the extra money to pay off high-interest debt (for example, debt with an interest rate well above 4 percent).

No matter what, you should make the minimum payments on all your debts first, and then pay off some debts faster.

There are two main ways to pay off debt:

The avalanche method pays off debts in order of interest rate, starting with the debt with the highest interest rate. This is the most financially optimized method of paying off debt, with you paying less overall than the snowball method.
The snowball method, popularized by Dave Ramsey, involves paying off debts in order of balance amount, starting with the smallest. Paying down smaller debts can initially provide a psychological boost and improve liquidity conditions, as paying down debt frees up minimum payments. The disadvantage is that larger loans (which may be offered at higher interest rates) remain the same for a longer period of time, resulting in higher costs in the long run.
For example, debtor Dan has the following situation:

Loan A: $1,100, minimum monthly payment of $100, 5% interest
Loan B: $3,300, minimum monthly payment $300, interest 10%
Sudden windfall: $2,000
Dan must first make a payment of $100 + $300 = $400 to cover the minimum payments on Loans A and B in order for the payments to be recorded as “on time.” The additional $1,600 can be applied to Loan A (minimum balance, snowball method), leaving $600 for Loan B, or all of it applied to Loan B (highest interest rate, avalanche method).
What’s the best approach? /r/personalfinance Go for the avalanche method, but don’t underestimate the psychological impact of paying off debt. If you think the psychological boost of paying off a small debt early will help you stay on track, then go for it! You can always change it later. It is important that you start paying off your debt as soon as possible and continue paying it off until it is paid off. With unbury.me you can find out how long each method will take and how much interest you will pay in total.

Should I rush to repay my low-interest loan? Which plan is “low” enough that I only pay the minimum?

Depending on your attitude toward debt, you may want to stop paying more than the minimum payment on a low-rate loan once you’ve paid off all your other loans above the minimum payment. A common argument is that the long-term returns from investing in the stock market could exceed the interest rates on low-interest loans. Even if this has happened in the past, you should remember that paying back the loan represents a guaranteed return at the interest rate on the loan. Stock performance is never guaranteed. The rough consensus is that loans with interest rates above 4% should be repaid early in the debt reduction phase, while loans with interest rates below that can be deferred.

Shouldn’t I take out a loan to improve my credit score?

No. The loan term should not be longer than necessary because you should not pay a penny more in interest than necessary in order to improve your credit score. The interest rate should be the only factor that determines whether you pay extra on your loan.

Step 4: Contribute to an IRA

The next step is to make contributions to the IRA during the current tax year. You can also make contributions for the previous tax year if it was between January 1 and April 15. For more information about IRAs, see the IRA Wiki. Aim to save 15% of your gross income until you reach your annual limit of $6,500.

Should I do Roth or Traditional?

Read Roth or Tradition.

Why should I contribute to an IRA when I have a 401(k)?
IRAs often have better funding options than employer-sponsored plans because you can open one with the provider of your choice. Low-cost providers such as Vanguard, Fidelity and Schwab all offer index funds with low expense ratios. However, you can replace step 5 with step 4 if any of the following conditions are true:

Your employer offers an excellent 401(k), 403(b), 457, SEP-IRA, or SIMPLE IRA that includes low-cost index funds (i.e., domestic stock index funds, international stocks with expense ratios less than 0.1%) index funds). 0.2% expense ratio and bond index funds below 0.1% expense ratio).
You can use the federal government’s Thrift Savings Plan.
A common situation where it may be more advantageous to swap step 5 with step 4 is if you exceed the IRA income limits and cannot fully deduct traditional IRA contributions and backdoor Roth IRAs because the proportional tax is impractical for you.

higher education spending

If you’re going to college in the next few years (or are already in college) and have some college expenses to pay (e.g. parents, scholarships, grants, etc. don’t cover them all), then saving for college is a top priority in pre-retirement planning. College savings should be invested in low-risk, low-volatility investments, such as an emergency fund.

Consider whether the cost of the degree you are pursuing will help you pursue a career that will be financially and non-financially rewarding for you. Also see recommendations for high school students and youth ages 15-20.

Note that saving for your future children’s education expenses is step 6 below. You and your children can both take out loans for college, but not for retirement.

Step Five: Save More for Retirement

If you still have money you want to set aside for retirement after funding an IRA, consider rounding your contributions into your employer-sponsored account (if you have one) so that you contribute as much as your budget allows. For more information about 401(k) plans, see the 401(k) Plan Wiki. As with step 2, you cannot contribute directly to a 401(k) (they must come from payroll deductions). Adjust your salary contributions accordingly.

If you are self-employed, you should consider opening a personal 401(k), SEP-IRA, or SIMPLE IRA for this step.

If you are not self-employed and your employer does not support retirement accounts, you will need to use a taxable account to perform this step. Ask your employer to consider offering a 401(k) or at least a SIMPLE IRA.

You should save at least 15% to 20% of your total income for retirement before saving for other purposes. If you’re behind on your retirement savings, you should save more than 15% if possible. If you can’t save 15%, start with 10% or some other amount until you can save more.

My 401(k) plan sucks. Should I still contribute?

Yes. You should always use your tax-deferred retirement account before saving into a taxable account for retirement. The effects of high expenses take a long time to show up, and 401(k) plans are quite affordable. After you leave your job, you can convert your employer plan to an IRA, or sometimes you can convert it to a new 401(k) plan with your new employer. A bad 401(k) plan can eventually turn into a great IRA.

Step 6: Save for other goals

Once you’re on the road to retirement, you’ll have greater flexibility with your discretionary income. The basic options are:

Take advantage of tax benefits to save on projected future medical and education expenses.

If you have a qualified high-deductible health plan (HDHP) and meet the requirements, a health savings account (HSA) is a great way to save for future medical expenses.
If you want to save for college for your children, yourself, or another relative, consider your state’s 529 funds.

Save money for more immediate goals. Common examples include home down payment savings, vehicle savings, paying off low-interest loans early and vacation funds.
Save more so you can potentially retire early (see “Advanced Methods” below) and only use taxable accounts after you’ve exhausted your tax-advantage options.
Change by giving. One of the benefits of a healthy financial lifestyle is that giving becomes easier. Once you take control of your health care and future education costs and take that step, you can help make a difference for others through your donation. If you can’t afford to donate, there are other ways to donate.
How you order these options is up to you. However, the flowchart recommends prioritizing an HSA if you have a qualified HDHP or a 529 if applicable to your situation.

The time frame of these goals determines the type of account you deposit into. For short-term goals (less than 3-5 years), consider an FDIC-insured savings account, CD, or I-Bond. If your time horizon is longer or you have the ability to adjust your plan, you might consider riskier investments such as a balanced index fund or a three-fund portfolio (both of which are a combination of stocks and bonds). Which savings or investment vehicle is best depends on your time frame and risk tolerance. Please feel free to open a thread with details about your situation and we will help you.

Remember (especially for young people): the longer your money has to grow, the greater the impact of compound interest on your savings. If the goal is to retire early (even before age 59.5), you should absolutely maximize all available tax-deferred accounts (IRAs, 401(k)s, HSAs, etc.) before moving into taxable accounts. Because you can choose to withdraw funds from a tax-advantaged account before age 59 1/2 without penalty.

If you use taxable accounts to achieve any of your goals, you should be proficient in asset allocation and tax-efficient allocation of funds across multiple accounts.