We get bombarded daily with competing messages about savings: your retirement, your child’s college education, a house deposit, for example. All of them may make sense but few of us are in a position to fully fund all of these at once so how do you prioritize these financial goals. Is there a magic formula for figuring this out?
Well, there isn’t a formula because each of us has different goals and we view their importance differently. We also have different income and different fixed expenses so prioritizing your goals should be a custom plan, crafted for your current situation, implemented, monitored, and adjusted as life changing events occur.
That brings us to a starting point. You need to be realistic based on your fixed overhead, i.e. taxes, mortgage (if applicable) and your other regular monthly expenses, such as utilities, car and health insurance, and cell phone. Deduct these expenses from your monthly income and what remains is what’s available for these financial goals. For planning purposes this is an important figure and from here you can start to consider a few goals, such as:
- Emergency Fund (the “I’m no longer employed stash”)
- Retirement Fund
- College Savings
- New Home Purchase
- Vacation Home
- Emergency Fund – Generally, it is a good idea to save for that unexpected situation where you find yourself unemployed. The typical recommendation is to have a fund equal to six months of expenses. Tally up your mortgage, taxes, car payment, insurance costs, utility bills, food costs, gas and car payment. Work towards saving this in an account that is liquid. Short of those that are retired, this goal should be #1 on the list.
- Retirement Fund – In my opinion, funding retirement should be the second most important goal. Once you exit the workforce, social security, if it is still viable, may not provide the lifestyle you anticipated. Also, should you have an unexpected life changing event that keeps you from earning; you will have set aside funds to help you once you become of retirement age. Whichever form of retirement savings makes the most sense, try to fund to the maximum level permitted. If funding to this level is not feasible, then try to fund your retirement plan to the level where you take full advantage of any employer matching funds. Have this conversation with your financial advisor. If it’s a 401 plan, 457, your IRA or SEP allocate a portion of your income and forget about it. The reason I feel retirement funding is more important of a goal than college savings, is because your children may be able to find an alternative source for their college expenses.
- College Savings – If you’ve funded your Emergency Fund, are continuing to fund your Retirement Fund, and still have additional disposable income, now is the time to focus on a College Savings account for your children. There a few options on how to fund a higher education account and the earlier you start funding the account, the better off you will be. Higher Education costs have and will only continue to increase year over year. Again, have this discussion with your financial advisor.
Let’s stop there for now. You may have read this and agreed that this makes sense for you. You may also have read this and disagreed with my message. You may feel that funding your child’s education is more important and that living through retirement on a minimal budget is ok. The point is to know your own priorities and to build your plan from there. Remember no one set plan fits all. Once you develop your plan the next step is to monitor it periodically (annually) and compare where you are versus where you want to be. For example, once you have your Emergency Fund, you can start working on a new goal and you will need to periodically review your Emergency Fund to adapt it to changes in your life such as a new home or growing family. Similarly, you’ll need to review your plan itself for changes in your situation: you may have changed jobs and be earning more or less; you may receive an inheritance or a structured settlement or you may be getting married. Just like the stock market, your plan may need to “zig and zag” as things change in your world.
Having the proper guidance through this process is invaluable. The right financial advisor isn’t there to tell you how to spend your money but is there to make sure you are on the path you chose to be on, reviewing the course along the way, and not ignoring it for years on end and only to revisit it after it is too late.
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Greg Rosen is a Financial Planning Specialist and Financial Advisor, in Bedminster, NJ with the Global Wealth Management Division of Morgan Stanley Wealth Management. He is a licensed life, accident, health or sickness insurance provider. He can be reached at 908-306-8029.
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