Creating financial goals can be an exciting and exhilarating experience. After all, who doesn’t love the idea of a wealthy retirement full of travel and spa days, or a brand new home with a huge down payment?
Yet, before you get caught up dreaming about financial freedom, it’s time to come back down to earth. Alas, visualizing your goals and making your dreams happen are two different things. In order to reach your money milestones, you’ll first need to create a plan – and this should encompass both your financial obligations and saving up for the fun stuff.
To help you prioritize your goals and obligations, we’ve put together a list of 7 steps to maximize your financial potential. Take a look:
1. Get a head start on your emergency fund
Paying down debt and investing for the future won’t do you much good if your furnace goes kaput and you don’t have the funds to fix it.
An emergency fund, however, can help protect you from unexpected setbacks. To get started, start saving money with the goal of earmarking at least $1,000 into a designated fund for emergencies. While you may want to come back to this account later and add more money, your first $1,000 will surely help you if you need cash for a small home repair or other minor emergency.
2. Get your 401(k) match
Nearly two-thirds of 401(k) participants qualify for an employer match, according to a study by Vanguard. If you belong to this group, you should take advantage of this ASAP as an employer match means free money to you. Cha-ching!
For example, let’s say you earn $60,000 a year and your employer matches up to three percent of your salary in 401(k) contributions. So, if you contribute $150 per month, your employer will contribute another $150. That’s an immediate return of 100% on the money you invest, making the decision a no-brainer.
3. Get the right insurance
Small financial emergencies can set you back, but big ones can seriously cripple you.
If you have kids or other people who depend on you, life insurance offers essential protection. Even if you don’t have any dependents, you may still want to consider an affordable term life insurance policy. Term life insurance provides a death benefit to your loved ones if you pass away during a specific period. You can typically choose a term of five, 10, 15, 20, 30 or 40 years. In most cases, your premium stays the same throughout the term. Term insurance is worth having because it’s relatively inexpensive and protects your loved ones from suffering financial problems should you pass away during the term of your policy.
Talking about insurance, you may also want to consider disability insurance, especially considering you’re more likely to become disabled than die prematurely. Although your employer may offer this type of insurance coverage, you can also look into your own policies for both short-term and long-term disability insurance. This is wise way to ensure that you and your loved ones can still receive an income while you’re recovering from an accident or debilitating illness.
4. Pay off high-interest debt
Now that you’ve managed some of your biggest risks and taken advantage of your 401(k) match, you’ll want to tackle your toxic debt.
Specifically, if you have credit card debt or any other debt with an interest rate of eight percent or higher, it’s a good idea to pay it off as quickly as you can. We choose the eight percent figure because that’s higher than the typical seven percent annual return you can expect by investing that money instead.
Once you eliminate your credit card debt, you can take the amount you were putting toward your monthly payment and invest it into your savings or retirement account.
5. Return to your retirement and emergency fund
Now, it’s time to go back and start building your future.
For your emergency fund, you’ll want to add to that initial $1,000 by saving enough to cover three to six months’ worth of basic monthly expenses. This way you’ll sufficient cash on hand to pay for a bigger emergency.
For your retirement savings, aim to save at least 10% of your gross income. Note that your employer match is included in this goal, so if your workplace is contributing three percent, you should shoot for seven percent from your own income. In addition to your 401(k), you may want to open an individual retirement account (IRA), which can give you a little more control over your investments.
Remember: the amount you set aside each month for these two goals is up to you, but try to be as aggressive as possible without sacrificing your other financial goals.
6. Eliminate other debts
While you’re working toward building your retirement account and emergency fund, you should also begin paying down your other debts such as student loans, auto loans, and your mortgage.
Again, there’s no rule of thumb here for how much you should put toward this goal. So, it’s important to decide for yourself whether being debt-free is more essential than saving for retirement or contributing to your rainy-day fund.
7. Work on other investment goals
When you’re making good headway on your other savings goals, it’s time to look toward the future.
For example, if you have children or plan to have kids, you may want to think about saving up for their higher educational needs. A 529 College Savings Plan is a good option to do that. It allows you to invest your contributions and withdraw them tax-free for qualified education expenses. And, depending on where you live, you might get some extra tax deductions and credits for contributing to a 529 plan. We recommend talking to a fee-only financial advisor to help steer you in the right direction here.
Also, now is the time to consider other savings and investing goals, like taking a nice vacation with the family, upgrading your house or car, or starting your own business.
Pour a foundation first, then build upon it
Every financial plan is different, but building a financial house without a foundation will surely crumble at the first gust of wind. These seven steps, however, will help you create a solid plan for your short and long-term money goals. Are you ready to get started today?
This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.