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How to Prioritize Multiple Savings Goals

Despite our best intentions, we’re too often tempted to pull back on our long-term savings goals in order to satisfy more pressing financial matters—be it a surprise repair bill, an emergency medical procedure or some other unexpected expense.

Beyond immediate needs is the challenge of prioritizing competing medium- and long-term goals, like eliminating credit card debt versus the desire for a new car, or capturing the company match on a 401(k) versus adequately funding a 529 college savings plan.

“There’s no doubt about it: Our brains often focus on what’s right in front of us,” says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research. “So sometimes we need to remind ourselves to focus on the short and long terms.”

The good news, Rob says, is that investors needn’t starve one investment objective in order to fully fund another. Here are his top tips for heading down several savings paths at once.

1. Prioritize your goals

Start by not only articulating your goals but also listing them in order of importance. That said, everyone should make retirement of paramount concern. “You can borrow for or do without a lot of things,” Rob says, “but retirement isn’t one of them.”

Here’s what a sound hierarchy of some of the most common financial goals might look like:

  • Capture 401(k) match: If your employer offers a 401(k) plan with a matching contribution, this should probably be your No. 1 priority. “Failing to contribute enough to capture your company’s maximum match means leaving free funds on the table,” Rob says.
  • Create a rainy-day fund: Having cash on hand in case of an emergency can help you avoid having to borrow at unattractive rates—or, worse, dip into long-term investments. Aim to save enough to cover three to six months’ worth of essential expenses.
  • Sock away even more for retirement: In 2018, you can contribute up to $18,500 ($24,500 if you’re 50 or older) to a 401(k) plan and up to $5,500 ($6,500 if you’re 50 or older) to an Individual Retirement Account. “Even if you can’t afford to max out one or both accounts, every little bit helps,” Rob says.
  • Save for a down payment: Rob says that, depending on your situation, most people should plan to pony up at least 20% of the purchase price—and possibly more if the home will be a rental or vacation property. Even if the lender will accept a smaller down payment, saving more can help reduce private mortgage insurance premiums.
  • Contribute to college savings: Given the ever-escalating cost of higher education, the sooner you start saving, the better. This is the one priority for which there’s an established loan program, though, so don’t let it trump your other to-dos.

Other goals, such as saving for a big trip, a new car or a wedding, might need to take a back seat to more pressing objectives—which is where a financial planner fits in. “Defining and prioritizing your goals can be the toughest part of the financial-planning process,” Rob says, “and the right advisor can help you make smart choices within the realm of what’s possible.”

2. Invest by time frame

Once you’ve made a list, it’s time to sort your goals by time horizon and then invest the funds accordingly:

  • Goals for the next two years: Given the tight time horizon, these objectives would benefit from relatively liquid cash investments, such as certificates of deposit, money market funds or short-term Treasury bills.

  • Goals for the next three to 10 years: With an investment horizon that is neither short nor long, these objectives would benefit from assets that focus on not just growth but also capital preservation, such as a relatively conservative mix of bonds and stocks.

  • Goals more than 10 years out: With enough time to ride out the inevitable market vagaries, these objectives can benefit from a more aggressive allocation to stocks, which can rise and fall more dramatically in value in any single year but offer the greatest potential return over the long haul.

3. Consider the type of account required for each goal

For example, you could put your emergency funds in a standard savings account, your college savings in a 529 plan, and your nest egg in a 401(k) or other qualified retirement account. This approach can also reduce the temptation to use money earmarked for one goal to satisfy another—particularly because tapping a 529 plan for noneducational expenses or taking premature withdrawals from a retirement account can result in stiff penalties.

4. Put savings first

If you tend to save only what’s left over after paying your monthly expenses—rather than committing a specific amount or percentage to each objective in advance—your long-term goals are likely to suffer. Instead, pay yourself first (that is, put yourself ahead of other creditors) whenever possible, Rob says.

If you don’t already know how much you’ll need to set aside each month to reach your investment objectives, a savings calculator can help. Here, too, a financial planner will weigh your ongoing costs against your investment objectives. “It’s all a balancing act,” Rob says. “You want to find a solution that allows you to live comfortably today while making meaningful progress toward tomorrow.”

5. Stay on track

Finally, consider automatic deductions from your checking account or paycheck to ensure you’re consistently saving toward each of your established goals. These deductions can take the form of either a lump sum or, better yet, a percentage of pay that increases as your income does.

And be sure to track how your investments are performing relative to your goals—though not so often that you’re responding in real time to normal market fluctuations.

Rob also suggests periodic check-ins with a financial planner, particularly if you’re tempted to make any sudden moves that could upend your long-term plans. “Their role isn’t just to put you on a path toward your financial future,” he says, “it’s also to help you stay on that path—every step of the way.”

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