Spend less than you earn

Although this sounds very simple and even trite, it is very difficult if you are always running out of money before you run out of month.  The first step in turning around your financial situation is to decide to make a change.  Once you have decided you will do what it takes to be more financially responsible, then you should develop a plan.  Establish financial goals, and then support each of them with small steps that you can implement now to help you towards reaching your goals.

The first and foremost priority in your financial plan should be to:

Build up a small emergency fund

Everyone should have at $1,000 in cash dedicated towards an emergency fund.  This cash can be kept in a bank account, but it should be specifically marked for emergency fund.  Some call this a “do not touch” fund, but however it is labeled, this $1,000 is only to be used in the case of a bona fide emergency, such as an unexpected illness or repairs to your car to keep it in working order.

The next priority should be to:

Pay off all consumer debt

(i.e. credit cards, auto loans, student loans, and personal loans). There are two alternative approaches you can take in selecting which debts to pay off first.  You can pay off your debt in order of interest rate, attacking the highest interest rate debts first.  This approach makes the most financial sense, since you will be paying down the debts that are the most expensive first, thus reducing your overall interest expense.  Another approach is to prioritize your debts based on the amount owed.  You would begin attacking the smallest debt balance first.  Once that one is paid, begin paying down the next smallest debt until it is paid off, and so forth.  The advantage to this approach is psychological – you will have small, quick victories paying off the small debts, then you will gain momentum as you pick off subsequent debts, which will further encourage you to stick with the program.  Eventually all your consumer debt will be eliminated, and you will have reached one of your financial goals.  Without consumer debt, you will be in a much stronger position to pursue other financial goals.

Once your consumer debt is under control and/or eliminated (depending on your financial plan):

Start setting aside funds for your retirement

There are several types of retirement accounts available, and a full description of them is beyond the scope of this lesson.  Most financial advisors recommend contributing at least 15% of your gross income towards your retirement account.  This percentage may not be reasonable to start with, so pick a smaller amount to start with and plan on increasing this percentage as your financial health permits.  A general recommendation of where to start retirement investments is your employer’s 401(k) or TSP, since they typically provide investment matching.  A Roth IRA is also up good retirement investment vehicle.


build up your emergency fund to at least 2 months of your living expenses

An emergency fund at this level will give you more flexibility if an emergency arises.  You will be able to pay for any unanticipated expenses using cash instead of credit.

Continue to pay down your consumer debt until it is completely eliminated

At this point you will be debt free, with the exception of a mortgage.  Now continue to build up your emergency fund.  Most advisors recommend at least 3 to 6 months of living expenses available for emergencies.  A larger emergency fund is recommended if the source of income is unreliable (impending lay-offs) or fluctuates (commission based).   By having a fully funded emergency fund, you will be able to handle the unexpected financial emergencies that are part of everyday life.  Don’t repeat the same mistakes you made that got you into a financial mess.  Avoid using credit cards or making unnecessary purchases (rather make purchases based on your financial plan).

Finally, now that you have your debt eliminated:

Start saving for big expenses that are coming up

such as a car purchase, college tuition, or a summer vacation.  By saving for these expenses ahead of time and paying cash when they occur, you will have broken the habit of relying on credit and will remain financial free.

For an individual consultation concerning your financial needs or questions, call a Member Services Advisor at AAFMAA at (800) 522-5221.


John Sledgianowski is an AAFMAA Benefits Advisor.

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