The New Year is upon us, and with it comes the best of intentions for financially-savvy individuals and families: Pad that nest egg. Fund that 401k. Save for college. Pay down debt.
But this begs the question: With so many important things to save for, which one wins out? In other words, how do you best prioritize your savings?
While financial experts share a diversity of thoughts and opinions about how to best save, there are a few key principles that can help you manage your money wisely.
Make a List
First and foremost, devise a list of all the items for which you want to save. Include anything and everything: Retirement, your child’s college fund, a cross-country trip, your emergency account, private school tuition.
Then, next to each item, write a deadline. This will help you not only know what you are saving for, but when you need the money.
Categorize The Items
Next, assign a status to each item as a “want” or a “need.” For example, saving for retirement is a necessity, but a trip to Europe is arguably not essential to your health and wellbeing. Plan to prioritize the needs above the wants or the “nice to haves.” Some financial experts might even suggest that certain items we believe are critical – like helping our children pay for college – may not actually be true needs.
Calculate Your Savings Goals
Look at your list and decide how much you will need to apportion to each item, based on your stated timeline. For instance, imagine you want to save $1,200 by the end of the year for a home renovation project. You will need to start saving $100 per month in January in order to meet this goal, so decide what you want to sacrifice (like dining out) each month in order to meet it.
When in Doubt, always, always, always Fund Your Emergency Account and Your 401k
That brand new kitchen won’t help you if your roof caves in. Saving for an emergency should always be a priority, no matter your other savings goals. Without a well-funded emergency account (ideally 3-6 months of living expenses; some experts recommend 12), you are more likely to make a poor financial choice like racking up credit card debt or tapping into your 401k.
Similarly, funding your retirement account is vital, as it will directly impact your health and wellbeing in your later years. While you can borrow for many other expenses like college tuition, you generally cannot borrow for your retirement.
Different people have different priorities and goals, but no matter what, your emergency fund – and your retirement – should come first. Beyond that, you can focus on your “wants” list and begin to build wealth through investing.
Having a solid plan will help you stay the course when you are tempted to stray. Keep in mind that the smallest good habit – like putting aside $10 a month into a savings account, will pay dividends in the long run.