8-Step Guide to Saving for Multiple Financial Goals

When you're juggling multiple financial goals (reducing debt, planning for retirement, saving for a down payment on a home, funding a child's education, etc.), it can be overwhelming to figure out where to start and which goals to prioritize. If you're looking for direction, this guide can serve as a roadmap to give you an order of operations to consider.

If you have a 401(k) or similar employer plan and your employer offers a matching contribution, we believe that the best place to start is contributing at least up to the employer match. Many employer matching contributions are based on a percentage of the contribution you make and a percentage of your wages, for instance 50% of your contributions up to 6% of your salary. By prioritizing this goal first, you're ensuring that you're not turning down any "free" money.

By eliminating high-interest rate debt, you're able to free up money to help fund other savings priorities.

One of the biggest challenges when trying to get out of debt is knowing where to start. When paying off multiple credit cards, there are two common approaches to paying off debt:

• Debt avalanche: With this method, you focus on paying off debt like high-interest credit cards first, while paying the minimum every month on any other cards. After the highest interest rate debt is paid off, you pay off the card with the next highest rate, and so on. The idea is by focusing on the most expensive debt first, you'll save money in interest payments over time.
• Debt snowball: The snowball method is where you focus on paying off the lowest balances first to help build momentum. Once the smallest debt is paid off, you apply the money you were putting towards the original debt to the next-smallest debt amount and continue that process until all your debt is completely paid off.

Having an emergency fund helps you avoid borrowing from credit cards or tapping into retirement savings if you experience an unexpected job loss or an unplanned expense arises like a costly home repair, medical emergency, or necessary car repair.

It's a good idea to keep three to six months' worth of essential living expenses in a low-risk, liquid account like an interest-bearing checking account, money market savings account, or money market fund.

Consider having a more robust emergency fund if you are self-employed, are a single income household, or expect a job change in the near future.

Maximize your contributions, up to the annual IRS limits, to tax-advantaged retirement accounts, such as a 401(k), Roth 401(k), 403(b), 457(b) plan, traditional IRA, and Roth IRA. This can allow your investments to potentially benefit from compound growth. The sooner you put compounding to work for you, the better. Consider increasing your contribution (over the employer match) as often as you can, up to the max. Should you get a raise or bonus, consider using this additional money to help fund your retirement goals.

If you have a high-deductible health plan, consider saving the maximum within your Health Savings Account (HSA). An HSA can be a powerful saving tool because of its triple tax benefit: You get a tax deduction for contributions, the investments can grow tax-free, and you can use the money for qualified medical expenses at any time— penalty and tax-free.

Additionally, after age 65, HSAs can be used like a traditional IRA. Any distributions for non-medical purposes will be taxable, but they won't be subject to a penalty.

Note: The first four steps above are designed to be completed in order. Once you've tackled those, you can shift your attention to these last four steps and complete the ones that align with your personal goals.

If owning your own home is an important financial goal for you, consider saving for a down payment. The ideal amount to put down to avoid Private Mortgage Insurance (PMI) is 20%. If you fall short of the 20% down payment, the PMI cost is added to your monthly payment.

To estimate what you'll need for a down payment, get an idea of the purchase price and what type of monthly mortgage payments you can afford. The general rule of thumb is to spend no more than 28% of your gross income on principal, interest, property taxes, and insurance. With the high cost of homes, it can take a substantial amount of cash for a first-time home purchase. To save for a down payment, create a budget and a savings plan to help you get there.

Some debt like mortgages, student loans, and home equity lines of credit (HELOCs) can be considered "healthy" debt because they aim to increase your long-term net worth; however, if you're paying high-interest rates (any debt with an interest rate of 6% or higher is a reasonable threshold) on this debt over the 6% threshold, consider paying it down unless you can refinance at a lower rate.

When you're paying below a 6% threshold and your debt can be deducted from your taxes, it becomes more of a personal preference on how to proceed next—pay off the debt or invest. Of course, it's always important to make regular payments toward your debt, but for anything beyond the minimum payments, your personal financial circumstances and time till retirement all play into your decision.

Generally, it may make sense to pay down long-term debt, such as a home mortgage, by following a schedule and having a specific timeline for paying off the debt in mind. For instance, you may decide to pay off your mortgage by the time you retire to free up financial resources, giving you the ability to save and invest for other goals.

Saving for retirement should still be an important priority, but investment in education can also be an important part of a family financial plan. Contributing to an education savings account early can give you and your child a valuable head start. Accounts designed for education savings (like 529 plans and Coverdell Education Savings Accounts) can potentially provide tax advantages when used for qualified education expenses like tuition or certain school-related expenses like books, supplies, computers, and room and board. Any amount saved for education provides more flexibility and is less money you may need to borrow down the road.

Once you've paid off high-interest debt, have a strong emergency fund, have maxed out your retirement accounts, and have saved for other goals like a home or a child's education, congratulations, you've made significant progress to creating a strong financial foundation.

At this point, continue to invest and fund your short- and long-term savings goals. Investing can help you stay ahead of inflation and can help you earn more than you would in a traditional savings account. By investing early and often, regardless of what's happening in the market, investors can maximize the effect of compound interest over time.

We all face competing needs and priorities in our financial lives. Having a plan that's based on fundamentals can help us prioritize our goals. Create your own savings and investing plan that fits your unique needs, but we suggest using this guide to help you get started.