As you take stock of your expenses, you may feel like your budget is pulling you into a million different directions. You may have to repair your car, or save for retirement, or pay off your credit cards. You may have a new job that requires you to buy a new set of clothes, or you may have children and want to help save for their college education.
So, how can you balance these separate savings goals? A key strategy in successfully managing all these expenditures and deadlines is to prioritize.
If you need help prioritizing your budget, here are some tips and advice that can help you figure out which expenses to put your full financial effort toward, and which expenses can wait just a little longer.
Retirement Saving Comes First
Unless you're in extreme debt, there's no financial goal more important than saving for your retirement. However, far too few Americans prioritize retirement savings. In 2019, 25% of all working adults didn't have any form of retirement savings set aside.
Most people ignore retirement for two reasons—one, it seems far away, and two, they assume that they can just keep working into their 70s.
Unfortunately, not all retirements are voluntary. Job layoffs, age discrimination, family care obligations, and health issues can force people into early retirement. "Retirement" is ideally a choice, but it might be the result of forced unemployment.
If your employer offers a "matching contribution," taking full advantage of it should be your first budgeting priority. This is the only situation in which you'll earn a guaranteed "return" on your investment—you know your employer will add to your funds based on how much you invest. It may make sense to maximize your matching contribution, even if you have credit card debt. Your retirement comes first in almost every circumstance.
Employer contributions vary. For example, an employer may match $0.50 for every $1 you invest, up to 4% of your paycheck. If that's the case, make sure you're contributing at least 4% of your paycheck. Some employers will match dollar-for-dollar. Some employers will match up to 8%. Whatever the situation at your workplace is, learn how you can maximize the employer contributions—and make that happen.
Once you've maximized your employer contributions, or if your employer doesn't offer retirement contributions, then you can start to think about other financial priorities.
Pay Off High-Interest Debt
Not all debt is bad. There might be strategic reasons why you'd choose to only make the minimum payments on debt balances. They might have lower interest rates than other debt balances, for example, or they might offer tax advantages, or you may be able to eventually turn the loan into a grant.
However, if you're holding credit card debt, paying it down should be a priority.
Even if your credit cards are currently offering a 0% promotional rate, it's only a matter of time before that rate skyrockets into the double-digits. You want to pay off the debt before that happens.
Paying off your credit cards could be considered another form of a guaranteed "return" because you'll be saving yourself from high interest rates. As of June 2020, the average credit card interest rate was more than 20%. That'll add up quick, and eat away at your ability to save up for anything other than debt payments.
Start an Emergency Fund
After you've paid off your most troublesome forms of debt, you can avoid future debt by setting up an emergency fund. This fund will help you cover unexpected expenses like a major medical bill, or it can cover living expenses after an unexpected job loss.
Experts disagree about how large your emergency fund should be. One rule of thumb you might hear is that your emergency fund should be enough to cover three months' worth of living expenses. If your career has inconsistent income, you may want to save more. If you have significant amounts of money stashed away elsewhere, you may not need to save as much. The most important thing is that you set aside something in a designated emergency fund.
Keep Funds for Expected, Intermittent Costs
Someday, your roof will leak. Your dishwasher will break. You'll need to call a plumber. Your car will need new tires and brake pads.
These are not "emergencies" or "unexpected expenses." These are inevitable expenses. You know that home and auto repairs will be needed. You just don't know when.
Set aside a fund for these inevitable home and auto repairs. These savings should be kept separate from your emergency fund. Rather, this is a maintenance fund for predictable, inevitable expenses that happen at random intervals.
Likewise, you know that you'll one day need to buy another car. So start making a car payment to yourself. This will prevent you from needing to finance your next vehicle.
Assess Remaining Goals Individually
Once you've put away money for retirement, paid down your debt, and built up savings for both emergencies and expected maintenance costs, then you can start thinking about all your other financial goals. These extra goals can be prioritized by comparing their relative costs.
Make a List
Brainstorm a list of every remaining goal you'd like to save for. It could be a 10-day trip to Paris, a stainless-steel-and-granite kitchen remodel, or lavish holiday gifts for your parents. At this stage, don't pause to wonder how you'll pay for this. Whatever it is, add it to the list.
After you've got all your ideas down, write a target date for each of these goals. Don't worry about whether it's "realistic"—you're still brainstorming at this point.
Tally the Costs
Next, write the target sums next to each goal. Your dream vacation to Paris will cost $5,000. A kitchen remodel will cost $25,000. Lavish holiday gifts will cost $800. Be as accurate as you can with these figures. The more accurate they are, the better your budget will be.
Divide the cost of each goal by its deadline. If you put your deadline in terms of months, this will tell you how much you need to save every month to reach your goal. If you want a $5,000 trip to Paris within one year, for instance, you'll need to save about $416 per month ($5,000 ÷ 12). If you want to do $25,000 worth of kitchen remodeling in two years (24 months), you'll need to save about $1,041 per month ($25,000 ÷ 24).
Edit Your List
As you do the math, you'll probably notice that you can't meet all your goals by your preferred deadline—especially after you factor in retirement savings, debt payments, and building an emergency fund.
Remember, retirement, credit card payments, and emergency savings should be your top financial priorities.
So, since your initial brainstorm isn't realistic, it's time to start editing those goals until they are realistic. You can cut a few goals completely. You may decide you don't need a remodeled kitchen, after all. You can also change the deadline for some goals. A Paris trip in a year might be realistic, but if you push that deadline back by just six months, you can cut more than $100 from the amount you'll need to set aside monthly.
The Bottom Line
Retirement comes first, when it comes to budgeting priorities. Behind that, you need to tackle your high-interest forms of debt, such as credit card balances. From there, you can focus on building up emergency and expected maintenance savings. Only after you've covered all of those goals should you consider extra expenditures.
Don't forget, money management is a two-way road. Money comes in, and money goes out. A well-defined budget will help you avoid debt and work toward your financial goals, but you can increase your savings rate by earning more. If a pay raise isn't in the cards for you, look for additional jobs that you can tackle during the evenings and weekends. Save every dime that you earn from your second job, and use your primary job's paychecks to cover living expenses and debt payments.
Pretty soon, with enough discipline, you'll be on a flight to Paris.