June 7, 2024

Some people are savers, some are spenders, some live carefully within their means, and some live life to the fullest, even if that leads to debt. Regardless of “money personality,” life brings changes in circumstances, income, and expenses. So, even if you saved diligently in your youth, at some point, you may be faced with a combination of financial obligations that make prioritizing money goals tough.

From daily expenses, loans, and credit card debt to saving for retirement or your child’s education, what goes at the top of the list?

Here’s a guide to help you prioritize financial goals.

Establishing Priorities

1) Emergency Fund

Before focusing on long-term savings or debt repayment, your priority should be building an emergency fund.  This “safety net” is for unexpected things like job loss, car or home repairs, or medical emergencies. Try to save three to six months’ worth of living expenses.  Keep emergency savings separate from your “every day” spending account but make sure you can access the money if necessary.

Use your emergency fund to avoid taking on debt.  Prioritizing emergency savings helps ensure a short-term challenge doesn’t become a long-term financial disaster.

Helpful tip: Treat your emergency fund like a monthly bill.  Set up automated transfers to your emergency savings account so the account grows consistently without extra effort.

2) Retirement Savings

Retirement should be near the top of your priority list especially if your employer offers a retirement savings match.  Why should you save for retirement before things like your child’s education? 

First, if your employer offers a match, bypassing retirement savings in favor of other financial priorities is like walking past a $20 laying on the sidewalk.  Your employer’s match is like getting “free money” for your future retired self and that’s something you don’t want to pass up.

Plus, there are a variety of funding options for education like scholarships, grants, and student loans.  But without a paycheck, you probably won’t find a bank willing to give you a loan for retirement.  As Americans live longer in retirement, you may need more in your retirement nest egg to avoid outliving your assets.   

Helpful tip: It can be hard to save a lot right away.  Thanks to compound interest, though, even a small contribution now can result in significant savings as it grows over time.  So the most important thing is to start saving something and then try to increase your savings rate by 1% each year.

3) High-Interest Debt

There are two kinds of debt.  Good debt is for things that grow in value over time like a home mortgage.  Bad debt is for things that lose value like credit card debt.  Bad debt often comes with high interest rates so this should be your next priority. Eliminating the interest expense and paying off debt balances will free up money for other financial goals.

If you have multiple debts, you might need a debt elimination plan.  There are two common methods:  the snowball method (pay off debts from smallest to largest) or the avalanche method (pay off debts with the highest interest rates first). Then, stick to the plan until your high-interest debts are cleared.

Helpful tip:  An important part of eliminating debt is to stop accumulating it.  Put credit cards in a drawer and set up automatic payments for the minimum amount to avoid late payment fees.  If you have a good history of on-time payments, call the lender and ask if they can lower your interest rate.

4) Children’s Education

The reason this falls last on the list of priorities is certainly not because it’s un-important. Continuing education is costly so it makes sense to start saving early. But, if you must sacrifice this goal to focus on others, you can fund your child’s education in other ways. Scholarships, grants, and part-time student employment opportunities may options if you haven’t saved enough to cover costs.

Helpful tip: 529 savings plans or education savings accounts (ESA) offer tax benefits and can help you save for educational expenses. Setting up automatic contributions can help you maintain good habits and enable your fund to build steadily over time. Also, invite family members to contribute instead of buying birthday gifts.

This priority order is intended to be a guide. But changing financial goals, income, or other circumstances might force you to reassess and refocus from time to time. The key is to find a balance between the financial obligations you have today while also preparing for a secure financial future. If you have questions about strategies to make the most of your money resources, just reach out. We are here to help you!

*This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

**The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.