You've got plans. Goods you want to do, goods you want to acquire, and achievements you have high hopes of achieving. At one end of the range are things like paying for food and the rent or mortgage for the next month, which are examples of urgent financial responsibilities. On the other hand, long-term monetary objectives, such as retirement, may not be reached for years or even decades.
Things like houses, vehicles, vacations, eating out, medical bills, and school fees fall somewhere in the middle of the spectrum between necessities and desires. If you are like most people, you have a limited amount of money, so reaching your financial objectives will need careful preparation. The following is a guide for establishing and prioritizing your objectives. Below you will find how to plan for financial goals.
Most Important Financial Goals
Set aside $500 to cover emergencies
Saving enough money to cover three to six months of living expenses is the gold standard of emergency reserves so that a layoff or accident won't put you in a severe financial hole. It is recommended to have enough money saved for at least three to six months of living costs in case of an emergency. (It's worth emphasizing that we're discussing necessities here, like food and shelter.)
However, for many individuals, trying to save enough money to cover their needs for many months is an initial challenge they cannot meet. Try to save at least $500 as a starting point; this amount would be sufficient to cover the cost of an unforeseen auto repair or other significant expense. We don't want you to feel like you must put off making progress on the following two objectives forever just because you're having trouble clearing the first savings obstacle.
Where should you put your money in case of an emergency? Somewhere secure (guaranteed by the FDIC), liquid (meaning it is easy to access by withdrawal or money transfer in case of, you know, an emergency), and where it may even earn a little bit of interest. These requirements may be satisfied by opening a high-yield savings account with an online bank.
Contribute to your 401(k)
If your firm will match any percentage of your payments to an employer-sponsored retirement plan, such as a 401(k) or 403(b) (the equivalent for workers of nonprofit organizations and public service organizations), you should sign up for the plan as soon as possible. (The necessary papers may be found in your human resources department.) Make sure you donate at least enough money to qualify for all the matching funds your employer provides. The most frequent company match is fifty percent of the employee's contributions, up to six percent of the employee's income. That might amount to free money equivalent to three percent of your annual wage.
Pay down high-interest-rate debt
It may seem out of place to bring up the topic of credit card debt in a book that also covers investment and retirement planning. It is not that. It's not hard to figure out. If you carry a load on your credit card and pay an interest rate at or above the high single digits, paying down the amount will save you more money in interest payments than your potential return on investment will be. (Except for the aforementioned employer match, which I previously noted since it represents an assured return on investment.)
How to Prioritize Various Financial Goals
It is time to get down to the nitty-gritty of planning after you have completed the first financial "to dos" A delicate balancing act must be performed when determining how much of each paycheck should be put towards short-term and long-term savings goals, respectively. However, it is not impossible to do.
We are strong proponents of the "pay yourself first" school of thinking, which suggests that you deposit some of each paycheck directly into a savings account for your "Future Self" as soon as possible. Putting aside 10% of your salary before taxes is a smart place to start; saving 15% is ideal. Because both your contribution and your employer's contribution count towards the 10% or 15% objective, if you contribute to your 401(k), you are well on your way to achieving either of those goals.
Then, while the retirement saving mechanism hums along on autopilot in the background, you are free to concentrate on your more pressing goals and requirements. Regarding your non-retirement-related objectives, consider the following questions:
- What is the price going to be? Obtaining precise expense estimates is the first step in setting attainable savings objectives. Do some research on the costs of the items on your shopping list to ensure that your target is within a reasonable range.
- In what time frame do I need to have the money? Take that total cost and divide it by the number of weeks, months, or years that remain before your deadline. If seeing that amount causes you to give a second take, you may want to reconsider either the aim (perhaps selecting a less expensive option) or the period (perhaps delaying the big trip until the following year).