We all have goals we want to achieve. You probably have a long list of things that you want to save for and you’d probably put money toward all of them if you could.
However, everyone has a limited amount of money. We know some of that money will inevitably need to go toward everyday living expenses.
That leaves only a portion remaining to put aside towards your longer-term financial goals. This is where the hard decisions start.
Making the Hard Decisions About What to Save For
You want to make sure that the money you are saving toward your future goals works as hard as possible for you.
Some of the questions you may be asking yourself are:
- How do I come up with a plan that most efficiently uses each dollar that I save?
- What goals should I start with?
- How much should I put toward those goals to make sure I am maximizing my savings?
The good and bad news is that all of these decisions are up to you.
Everyone may have a slightly different way to approach this problem. We have some tips that may help you figure out how to put those extra dollars to the best use.
4 Steps to Prioritizing Your Goals
#1. Start with the obvious. Short-term goals.
Do you have a big expense coming up in the very near future? Maybe a child is starting college or you’re purchasing a house. That is going to be the place to start.
You’ll want to make sure that you are on track to afford any big expenses that are coming up in the next year.
That way, you won’t find yourself scrambling at the last minute and potentially pulling money from other savings accounts to cover an immediate need. This could put you even farther behind on those goals.
Get an idea of whether or not you are on the right track to hit your near-term goals. If you’re not on-track, this is where you should be putting your extra cash. Recalibrate your plan to get yourself back on track.
#2. Make sure you’re prepared for the unexpected with a Rainy Day Fund.
Once your more immediate expenses are taken care of, how do you prioritize the many other goals you might have?
Unfortunately, no one knows what the future may hold, but that doesn’t mean you can’t be prepared with a financial cushion.
Think about starting a Rainy Day Fund that you can dip into in hard times. If you unexpectedly lose your job or have a big medical expense, it’s nice to know that you have some money set aside to cover you.
A good rule of thumb is to have a Rainy Day Fund that covers about 6 months’ worth of living expenses. This not only gives you peace of mind, but also prevents you from needing to dip into the savings pots you’ve set aside for your other financial goals, potentially having a negative impact on your progress toward achieving them.
#3. The more time you have, your money can actually make money. Look to far-off goals.
Did you know that the dollars you aren’t spending can actually earn you money? It’s true! This is what happens when you have your money in a savings account, for example, or invested in a portfolio.
With a savings account, the bank will pay you to keep your money in your account and not spend it. This is called “interest”.
With an investment account, your dollars earn money when the companies you are invested in grow and become more valuable. Be aware that companies can also become less valuable, so there is a chance you lose money. You can read more about this in our post on understanding risk.
So how does this help you prioritize your goals? Well, the farther out your goals, the more money your dollars could earn, ultimately making them more valuable.
Think about something like a retirement goal or perhaps a college fund for a young child. Because there is a long time frame associated with these goals, you can stretch your dollars farther over time.
These are the goals you should be focused on saving for next.
#4. Start chipping away early at your goals with the largest price tag.
You probably have one or two goals that feel big, and maybe even a bit unattainable. We all know it’s easier to save for the smaller goals you know you can easily hit, like a trip you want to take or a nice piece of clothing you want to purchase.
But those Big Goals aren’t going to get any smaller. The earlier you can start chipping away at them, the better.
You may be surprised how quickly a little bit of savings every month adds up. For example, putting aside $500 a month leaves you with $6,000 by the end of the year.
But the real secret is…experiment!
Traditionally, financial planning is hard, requires an expert, takes a long time and a lot of data. All of this can provoke anxiety. At GBI, we think you should be able to freely outline financial plans with ease in a comfortable environment.
These four steps can help guide you as you start to build out your financial plans, but think about using our approach and build out a few versions of plans for each of your goals until you find what works best for you.
For example, build a plan where you put more savings toward retirement than the house you want to buy, and then flip flop. See where your money goes the farthest and what strategy may help you hit your goals in the most efficient way.
Are you ready to get started building plans for your financial goals? Click here to sign up for early access to the GBI app where you can experiment with building plans for your goals.