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How to prioritize savings and investing goals

You know the importance of being smart with your money.

But setting proper financial priorities can feel overwhelming when you have so many things competing for your time and attention. However, don’t let this one slip to the sidelines.

Here are some common questions answered and tips to get you started:

How do I make smart financial goals?

You’ll want to approach setting financial goals much like you would planning a trip. You have a starting point — where you are right now — and a destination, or where you want to be. And you may have a deadline of when you need to get to your destination, or be able to choose that — like if you need to pay for college, want to buy a house in three years, or save a specific amount for a down payment for a car.

Use the SMART (Specific, Measurable, Attainable, Realistic, and Time-related) system when setting your financial goals.

Once you have a specific savings goal in mind, you can automatically set aside a certain amount of money each month — or every paycheck — to go toward that goal.

Make a plan, and automate it if you can

Financial goals are best met when integrated into a structured plan that is easy for you to stick to — or that's automated and done for you. 

Set aside a portion of each paycheck and put it in your savings account. Make it the same amount every time you get paid. And if you can use direct deposit, consider having a set amount of money automatically taken out of your paycheck or checking account and deposited into your savings account on a regular basis. 

If your savings are automated, you don't have anything to forget about. And if the money is moved to your savings and you don't see it, you won't be as tempted to spend it.1

And it may be easier to start small — over time, those savings add up. And try thinking about saving in smaller chunks of money — like framing it in your mind as $5 a day rather than $150 a month. They equal the same amount at the end of 30 days, but research has down that the $5-a-day approach made people 4 times more likely to start saving.2

Why and how do I prioritize my financial goals?

You need to make specific financial goals for you and your family. You don’t want to risk missing out on important objectives because you’re too busy paying attention to/concentrating on the low-hanging fruit — your day-to-day expenses.

List your financial goals

Start by making a list of all the things you need to make you feel secure and fulfilled — in the short term and the long term.

Short term goals may be to buy a car, pay for a wedding or vacation, or pay for some home repairs.

Longer term goals may be to get out of debt — like paying off credit cards or a home equity line of credit — paying for your child’s education or saving for retirement. Or maybe it’s to buy a vacation home.

Whatever you hope to accomplish, narrow the list down to approximately five goals.

Rank your savings goals

Then, rank your goals. Weigh the pros and cons of each item, as well as the opportunity cost of choosing one thing over another.

Not sure that you can set aside enough money for a child’s education and your own retirement? Then, one might need to take priority over the other — especially if one of them could be harmful if deferred.

For example, you can borrow money to pay for tuition, but not to fund your retirement — which you have to save for. So you may have to make some tradeoffs — saving for a portion of your children's education and your own retirement.

Speaking of retirement — if one of your goals is to be financially stable after you retire, make sure you’re contributing to your employer’s retirement account. And don't forget to take advantage of your employer's match program — which can result in increasing your savings immediately and potential for greater returns in the long run due to the rule of compounding.3

Once you do that, if you have any high-interest debts with rates above 4 to 6 percent, you might want to pay them off before contributing beyond your employer’s match, since those high interest rates could be higher than returns you're earning on other investments, depending on market conditions.

What are examples of financial goals I should have?

Your financial goals will likely be a mix of long- and short-term ones.

Long-term financial goals might include:

  • Debt reduction 
  • Retirement savings
  • Putting money away for your children’s college fund 

Short-term financial goals might entail:

  • Reducing your debt 
  • Creating a vacation fund
  • Saving enough money in case of an emergency
  • Creating a monthly budget that compares how much money you spend versus how much you make.
  • Cutting costs on three monthly bills. For example, can you drop your cable bill, change to a more cost-effective cell phone plan, or reduce how much water or electricity you use?
  • Meeting with a financial planner on an annual basis to make sure your financial plan matches your life goals.
  • Going on a spending fast for at least a month. You might be surprised how much you really don’t need and there are fun free activities to do, if you go in with an open mind.4

What should I consider when prioritizing my financial goals?

Pay attention to interest rates

When the Federal Reserve raises short-term interest rates, it can have a direct impact on your financial goals.

Rising rates can mean that what you earn on savings (i.e., bank savings accounts and interest-bearing checking accounts) and pay on debts (i.e., credit cards and variable-rate student loans) will both increase.

The effects on revolving consumer credit — like credit card rates and rates on a home equity line of credit (HELOC) — can be less dramatic, but variable rate loans change with the Federal Funds rate, so the impact is more immediate.5

If you have a variable-rate or adjustable-rate mortgage, you may notice a bigger increase — and may want to make a switch to a fixed-rate mortgage so your interest rate doesn’t keep climbing with future Fed interest rate increases.

Tax consequences

If you want to save on income taxes (and who doesn’t?), your best options are to minimize your income and take advantage of tax credits.

You can decrease your adjusted gross income (AGI) by maximizing your 401(k) contributions. Also, a Flexible Spending Account (FSA) and Dependent Care Reimbursement (DCR) lets you deduct part of your income tax-free to pay for co-pays, medical equipment, and more.6

And there’s more. Everyone has to pay a capital gains tax when you make a profit from an investment. It’s best to consult a tax advisor for advice regarding your specific circumstances.

Without an emergency savings, what can go wrong with your plan?

Without emergency savings, you won’t have a stable foundation for your financial security. It’s separate from your retirement savings and your regular savings account.

Have an emergency fund

Experts recommend having three to six months’ of income set aside for unexpected expenses. However, if you’re unable to save that amount, don’t worry. Start small. One idea could be see how fast you can save $1,000. Or how much you can save by cutting out work lunches and putting that money toward your emergency fund instead?

When you draw from the account, be sure it’s for real emergencies (like a leaky roof). And pay it back systematically. And while you’re saving for an unexpected emergency, you don’t want to forego other financial goals, like contributing to your retirement. 

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1. "What to save for." Consumer Federation of America. Accessed October 20, 2021.

2. Adamczyk, Alicia. "Why saving $5 a day is better than $150 a month." CNBC. Published March 9, 2020.

3. FINRA Staff. "Retirement isn't free — But your 401(k) match is." FINRA. Published July 14, 2021.

4. Caldwell, Miriam. “10 short term financial goals for the new year.” The Balance. Updated July 28, 2021.

5. O'Connell, Brian, and Benjamin Curry. "What happens when the Fed raises interest rates?" Forbes Advisor. Published June 18, 2021.

6. Rose, Jeff. "Tax planning goals — Get your tax schwag on." Updated September 7, 2021.

DOFU 10-2021