Financial goals: how to set, prioritize and achieve goals for your future
Retirement planning guide
This article is part of NerdWallet’s plain language explanation of how to create, grow, and manage your money.
You have plans. The things you want to do, the things you want to buy, the milestones you hope to achieve.
On one end of the spectrum, there are immediate financial commitments like paying for groceries and next month’s rent or mortgage. On the other hand, there are long-term financial goals like retirement, which is years away, if not decades away. In between, there are wants and needs like houses, cars, vacations, dining out, medical procedures, and education costs.
When you have a limited amount – as most people do – achieving your financial goals takes planning. Here’s how to define and prioritize your goals.
The three most important financial goals
Let’s start with three goals that should be the top priorities on everyone’s list.
Objective 1. Set aside $ 500 to cover emergencies
The gold standard of emergency funds is to save enough money to cover three to six months of living expenses, so that a layoff or injury doesn’t drag you into a deep debt hole. (Note that we’re talking about expenses necessary to survive like food and shelter, not gourmet cupcakes and cat pedicures.)
But for many people, amassing several months of savings spending is too onerous to start with. So put the lofty goal aside for now and shoot for $ 500 as a starting point, which would at least help sort out an unexpected car repair or vet bill. We don’t want you to postpone your progress on the next two goals indefinitely because you’re stuck behind the first hurdle to saving.
Where should you keep your emergency fund? A place that is safe (FDIC insured), liquid (as easily accessible by withdrawal or transfer of funds in an emergency, you know), and where it might even earn a little interest. A high yield savings account at an online bank meets all of these criteria.
Goal 2. Contribute to your 401 (k)
If you have an employer-sponsored pension plan – like a 401 (k) or 403 (b) (the version for nonprofit and public service employees) – and your business is part of your contributions, do not waste time and register now. (Check with your human resources department for paperwork.) Donate at least enough money to get all the matching funds that your business is offering.
The most common employer match is 50% of contributions, up to 6% of salary. This could translate to free money worth 3% of your salary each year. We’ll get into details on how to invest in your 401 (k) – and other retirement savings accounts you might want to consider – in the next few chapters. Right now, it’s all about getting the free money you get from an employer match.
Objective 3. Pay off high-interest debt
Discussing credit card debt may seem irrelevant in a guide to investing and planning for retirement. It’s not. It’s simple math.
If you have a balance on your credit card and pay an interest rate equal to or greater than the high number, you will save more interest by paying off that amount than you will earn by investing. (The exception: the aforementioned employer match, because it’s a guaranteed return on your money.)
How to prioritize various financial goals
Once you’ve eliminated those first financial “to do’s”, it’s time to start planning.
As noted at the top of this chapter, retirement is just one of the many financial goals you will have in your lifetime. Deciding on what part of each paycheque toward which savings goal – short term and long term – is a balancing act. But it is absolutely doable.
We strongly believe in the “pay yourself first” school of thought, directing part of your paycheck into the piggy bank of your Future Self from the start. (We go into more detail about retirement savings strategies in Chapter 2.) Saving 10% of your pre-tax income is a good place to start; 15% is gold. If you are contributing to your 401 (k), you are on the right track, as your contribution and that of your employer count towards this 10% or 15% goal.
Then, as the retirement savings machine spins on autopilot in the background, you can focus on your most immediate wants and needs (such as kitchen, car, and daycare upgrades and additions). dress). For those goals other than retirement, ask:
1. How much will it cost? Achievable savings goals begin with accurate cost estimates. Look up the actual price of items on your shopping list to make sure your goal is in reality.
2. How soon will I need the money? Divide that cost by the number of months, weeks, or years between now and your deadline. If that number requires you to do a double take, consider adjusting the goal (replacing a less expensive alternative) or the time frame (pushing the dream family vacation away until next year).
3. Where should I put my savings? The answer here depends on what kind of time frame you landed in in response to the last question.
If you plan to reach your goal in less than five years, you should consider short-term investments like these:
Online savings account or money market account
• For emergency funds. • Liquid / easily accessible. • Insured by FDIC.
• For expenses with a fixed deadline. • Not liquid. • May require a minimum deposit. • Insured by FDIC.
1% to 2% (longer term = higher rates)
Short-term bond funds (index or ETF)
• Liquid / easily accessible. • Certain risks. • Subject to fund charges. • May require minimum investment.
You might be wondering why stocks aren’t on this list. Although the stock market has rewarded long-term investors with generous returns, over short periods it is subject to wild swings.
For example, suppose you invested $ 100 in 2008, just before the onset of the Great Recession. Your balance would have dropped to just $ 43 at the bottom. Now imagine what it would feel like if that $ 100 turned $ 43 had been set aside for next summer’s vacation or your child’s freshman tuition, starting this fall.
The lesson: The money you need over the next five years shouldn’t be invested in the stock market.
On the other hand, money that you don’t need to touch for the next decade, or three or four, is a candidate for investing in stocks. This is because you have more time to wait for market declines and ride the eventual recovery. (Remember $ 100? If you stayed invested it would have rebounded from the recession and jumped to over $ 180 by September 2018.)
For most people, this type of long-term time horizon applies to retirement savings. And for that particular purpose, there are specially designed accounts with tax-advantaged IRS treatment. We will cover them in the next chapter.
What to do when there is only a limited amount of paycheck? We’ve created this handy flowchart to show you how to direct your money when you have multiple financial goals and competing priorities.
Take a screenshot. Print it out and display it on the fridge. Doodle daily affirmations in the margins (“Hawaii, here we are!” “Debt, your days are numbered…”) and use them as a reference whenever there is a question about what to do with your currency spare.