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Financial Goals: Where to Begin

Check three financial goals off your list first: building a small emergency fund, maxing out 401(k) matching dollars and paying off high-interest debt.
Dec. 4, 2018
Investing, Retirement Planning
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We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Here’s how we make money.

You’ve got plans. Stuff you want to do, things you want to buy, milestones you hope to meet.

At one end of the spectrum are immediate financial commitments like paying for groceries and next month’s rent or mortgage. At the other is retirement, which is years, or even decades, away. In between are wants and needs like homes, cars, vacations, sushi, elective (or nonelective) surgeries and education costs.

When you have a finite amount of money — as most people do — achieving your financial goals takes planning. Here’s how to set and prioritize your goals.

The three most important financial goals

Let’s start with three financial goals that should be top priorities on everyone’s list.

Goal 1. Set aside $500 to cover emergencies

The gold standard of emergency funds is to save up enough money to cover three to six months’ worth of living expenses, so that a layoff or an injury won’t land you in a deep debt hole. (Note, we’re talking about necessary-to-survive expenses like food and shelter, not gourmet cupcakes and cat pedicures.)

But for many people, scraping together several months’ worth of expenses in savings is too onerous right out of the gate. So set aside the lofty goal for now and shoot for $500 as a starting point, which would at least help with an unexpected car repair or vet bill. We don’t want you to indefinitely postpone making progress on the next two goals because you’re stuck behind the first savings hurdle.

Goal 2. Contribute to your 401(k)

If you have an employer-sponsored retirement plan — such as a 401(k) or 403(b) (the version for nonprofit and public service employees) — and your company matches any portion of your contributions, waste no time and sign up right now. (See your human resources department for the paperwork.) Contribute at least enough money to get all the matching funds your company offers.

The most common employer match is 50% of contributions, up to 6% of salary. That could translate into free money worth 3% of your salary each year.

The most common employer match is 50% of contributions, up to 6% of salary. That could translate into free money worth 3% of your salary each year. We’ll get into the specifics of how to invest in your 401(k) — and other retirement savings accounts you might want to consider — in our article about how to save for retirement. For now, it’s all about getting the free money that an employer match affords you.

Goal 3. Pay down high-interest-rate debt

If you carry a balance on your credit card and pay an interest rate at or above the high single digits, you’ll save more in interest by paying that off than you stand to earn through investing. (The exception: the aforementioned employer match, because that is a guaranteed return on your money.)

NerdWallet has loads of tips and tools to help you pay off debt as quickly as possible.

How to prioritize various financial goals

Once you’ve got those first financial “to dos” out of the way, it’s time to get down to the business of planning.

Retirement is only one of many financial goals you’ll have during your life. Deciding how much of each paycheck to direct toward which savings goal — the near-term and the long-term ones — is a balancing act. But it’s absolutely doable.

We’re firm believers in the “pay yourself first” school of thought, by directing a portion of your paycheck into your Future Self’s piggy bank right off the bat. Saving 10% of your pretax income is a good place to start; 15% is golden. If you’re contributing to your 401(k), you’re on your way, since both your contribution and your employer’s contribution count toward that 10% or 15% goal.

Then, as the retirement savings machinery thrums on autopilot in the background, you can focus on your more immediate wants and needs (such as kitchen, car and wardrobe upgrades and additions). For those nonretirement financial goals, ask:

1. How much will it cost? Achievable savings goals start with accurate cost estimates. Research the actual price of things on your shopping list to ensure your goal is in the ballpark of reality.

2. How soon do I need the money? Divide that cost by the number of months, weeks or years between now and your deadline. If that number makes you do a double take, consider adjusting the goal (substituting a less costly alternative) or the time frame (pushing the dream family vacation out until next year).

3. Where should I put my savings? The answer here depends on the kind of time frame you landed on in answer to the last question.

If you plan to reach your goal in less than five years, you should consider short-term investments like these:

InvestmentQuick factsPotential return
Online savings or money market account• For emergency fund.
• Liquid/easily accessible.
• FDIC insured.
1% - 1.5%
CD• For expense with set deadline.
• Not liquid.
• May require minimum deposit.
• FDIC insured.
1% to 2% (longer term = higher rates)
Short-term bond funds (index or ETF)• Liquid/easily accessible.
• Some risk.
• Subject to fund fees.
• May require minimum investment.
1% to 3%

You might wonder why stocks aren’t on that list. Although the stock market has rewarded long-term investors with generous returns, over short periods of time it is prone to wild swings.

For example, say you’d invested $100 in 2008, right before the Great Recession began. Your balance would’ve dropped to just $43 at the bottom. Now imagine how you’d feel if that $100-turned-$43 had been earmarked for the next summer’s vacation or your kid’s freshman-year tuition, due that fall.

The lesson: Money you need within the next five years should not be invested in the stock market.

On the other hand, money you don’t need to touch for the next decade, or three, or four is a candidate for stock investment. That’s because you have more time to wait out the market’s dips and ride the eventual recovery. (Remember that $100? Left invested, it would’ve bounced back from the recession and grown to more than $180 by September 2018.)

For most people, this kind of long-term time horizon applies to retirement savings. And for that particular goal there are specially designed accounts with tax-favored treatment from the IRS. We cover them in detail in our guide to how to save for retirement.

Practical matters

What to do when there’s only so much paycheck to go around? We made this handy flowchart to show you how to direct your dollars when you’ve got multiple financial goals and competing priorities.

Take a screenshot. Print it out and post it on the fridge. Doodle daily affirmations in the margins (“Hawaii, here we come!” “Debt, your days are numbered…”) and use it as a reference whenever there’s a question about which financial goal should get your spare change.

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