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If you're managing your budget well, you have some money left at the end of each month. How do you decide what to save for — or pay off — first? Here are some ideas to help you decide.

Starting Your Emergency Fund

What would happen if you lost your job, had a sudden large expense or became injured and couldn't work? How would you pay the bills? An emergency fund could help you avoid going into debt while you recovered.

Most advisors suggest starting with a fund to cover three months of basic expenses, such as housing, food, utilities, transportation, healthcare, insurance and loan payments. You may need more than three months if your income is the sole support for your family.

To make consistent savings easy, think about setting up a special account for your fund. You also can make weekly or monthly deposits through payroll deduction or auto transfer.

Paying Off Debt

You may be working on paying off short-term debt, such as credit card balances. Many advisors would suggest paying off the debt with the highest interest rate first.

What if you need to address both emergency fund savings and paying down debt? Some people feel more secure making the fund the first priority, while making minimum payments on the debt.

No matter which priority you set, keep in mind that staying on top of your payments will help maintain your credit. It'll affect your ability to get a loan in the future. Some employers also request to see your credit report before hiring.

Getting the Full Match Offered by Your Employer

A third savings goal is your retirement plan at work — especially if your employer offers a match. If you don't participate by making your own contributions, you could be passing up free money.

Again, if you can't choose, consider splitting up your extra cash among all three — emergency fund, debt payments and retirement plan contributions.


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