Everyone has different dreams and goals in life, including when it comes to their finances. How and what you spend your money on is up to you. But how do you prioritize and save for those big life purchases or events? We’ve got some tips for you to get you started toward your financial goals.
As financial advisors and wealth investment managers, there are three goals that we suggest for everyone.
1. Saving for retirement
We talk a lot about saving for retirement and the many strategies that you can utilize to secure your financial future. One of the easiest ways to save for retirement is to contribute to an employer-sponsored retirement plan, such as a 401(k). Many employers offer a matching contribution plan up to a certain percentage. Take full advantage of this by maxing out your contribution to receive the full match. For example, maybe your employer will match 100% up to 5% of your salary. Waste no time in signing up.
2. Have an emergency fund
Having an emergency fund is a necessary safety net that could help you and your family should a serious situation arise, such as a layoff or injury that prevents you from working for an extended period of time. It’s suggested to save three to six months of living expenses for your emergency fund that could keep you from financial trouble should things take a turn for the worse. It’s important to remember that saving for this emergency fund should include enough money to cover basic living expenses such as food, shelter costs, and medical expenses.
3. Pay off debt
No one likes carrying debt and it can be a burden on your life. If you have debt that charges high-interest rates, such as a credit card, you want to work your way toward paying that off as soon as possible. The amount of money you will save from interest when you pay it off can then be filtered toward other financial goals you have.
Once you are comfortable with your progress toward the three priorities above, then you can start prioritizing and saving for your other goals. But how do you do this? Start by answering the following questions.
4. How much will it cost?
You can’t really know how much you need to save until you start researching the cost. For example, maybe you want to save for your first home. Start by researching areas where you want to live and recently listed house prices in those neighborhoods. Then, talk to a financial advisor so they can review your current financial situation and consider your future goals to give you an idea of what you can reasonably afford. You will also want to talk to a mortgage lender to see what loan amount you’re approved for. Once you have an idea of how much house you can afford, start saving. It is best to put down 20% of the purchase price to avoid paying private mortgage insurance.
5. When do I need the money?
You likely have a timeline in your mind of when you want to achieve your financial goal. Let’s keep the example of saving for a down payment on a house. You decide you can comfortably afford a $250,000 home, and you want to put down 20%, which is $50k. If you are starting from zero and want to buy a house in two years, you’d need to save more than $2k a month (50,000/24). You can adjust your timeline accordingly, knowing what you can afford to save.
6. How should I save for it?
Now that you know how much you need to save and how long it will take you to save for it, you have to decide how you will save for it (i.e. where should you put your money?). Here are some quick facts about different ways to save:
- Savings account or money market: this is a traditional place to save that is easily accessible and FDIC insured. The only drawback is they typically offer very low-interest returns. A savings account is ideal for your emergency fund.
- Certificate of Deposit (CD): This way to save is also FDIC insured but requires a specific set timeline. Once you deposit money into a CD, you must leave it there until the term expires. However, this is a safe way to save money and earn some interest.
- Short-term bond funds: This savings tool also requires a longer time frame (less than five years) for you to earn interest. Unlike the previous two options, there is some risk involved in short-term bond funds.
Once you have identified your financial goals, there are steps to take to save for them and achieve them. Whether it’s saving for the retirement of your dreams, or setting up a college fund for your children, we enjoy helping our clients identify their priorities and build an actionable and sustainable financial plan to achieve their goals. If you’re needing guidance, connect with us today to start building a better tomorrow.