Goals are also motivating and can drive you to take the actions you need to make them happen.
The key is not only understanding your goals but building them into your financial plans. Otherwise, you can have the goal of saving $200 per month toward your rainy-day fund, but will have no idea if that's feasible or can actually happen given your income and expenses.
Remember, while we can always make smarter money moves, try not to compare yourself with others. You may have things in common, but gender and race/ethnicity add differentiating factors of privilege. You have no idea what another's journey has been like or where they started financially.
Start by Listing Out Your Goals
Set a timer for 10 minutes and let yourself dream about what you want. These can be smart money moves, fun things that bring you joy, and both short-term and long-term aspirations.
Even think about the feelings you want to experience. What would you need to achieve financially to feel financial freedom, peace of mind, or stability? Write down anything that comes to mind. We'll narrow the list down later.
List out your goals.
Important Goals to Consider
Here are some important money goals to consider adding to your list:
Rainy-day fund (a.k.a. an emergency fund)
Retirement (a.k.a. work-optional)
Paying down high-interest debt (a.k.a. paying off credit cards)
Investing (a.k.a. making your money grow)
Time to Prioritize
Prioritizing means deciding which goals come first. Rank each of the goals you listed in the previous exercise in order of priority, with number one being your highest-priority goal. Consider which goals are most important to you, what's most urgent financially, as well as your timeline.
Do you want to pay off all of your student loans before saving for your future home? Do you want to aggressively save for retirement (and retire early!) or take an extra vacation each year? This is an extremely personal choice that each of us needs to make for ourselves. Some want to retire early and are willing to forgo some spending to do it. Others would rather spend more now and retire at a more typical age.
That being said, there are some commonly accepted financial guidelines to help you with prioritizing your money goals.
Priority #1: Some Rainy-Day Funds
Having some savings for emergencies is of top priority. If we don't have any money in savings and an emergency expense comes up, we'd have to either put expenses on a high-interest credit card or borrow. And in some cases, we wouldn't be able to pay because with certain expenses, like rent, paying with a credit card is not always an option.
Now, that doesn't mean you have to fully fund your rainy-day fund before anything else, but you definitely want a few months of emergency expenses saved up (more on how much you need later). In my conversation with Lauren Anastasio, a CFP and director of financial advice at Stash, she made the distinction between a crisis fund and a rainy-day fund. You want to have your crisis fund saved first and foremost, which might be a month's worth of expenses or $1,000. I call this your minimum rainy-day fund. Then once you max out your 401(k) match (priority #2) and pay off high-interest credit card debt (priority #3), you can focus on fully funding your rainy-day fund (or your ideal rainy-day fund).
Priority #2: 401(k) Match
401(k) matching, when available, is free money your employer gives you when you contribute up to a certain amount to your 401(k). But really it's part of your total compensation. If your company matches 3%, then for any amount you contribute toward your 401(k), up to 3%, they match it dollar for dollar. That's a 100% return. I talk about this more in Chapter 7.
Priority #3: High-Interest Credit Card Debt
Credit cards come with interest rates that are often as high as 15–30%. Holding a balance on your credit cards costs you money in interest. If you make $100 monthly payments on a credit card with a $5,000 balance and an interest rate of 20%, you'd pay the card off in nine years and pay $5,840 in interest. Yikes! This is not to depress you or make you feel guilty, just to show that this is why paying off high-interest credit cards should be high on your priority list.
Priority #4: Retirement (a.k.a. work becoming optional)
We'll be talking a lot about retirement (in Chapter 7) but this means saving up enough money so you don't have to work. It's really important because other than credit cards (which are way too expensive), saving (but really investing) is the only real way to fund your retirement. Also, retirement accounts are tax-advantaged so it's a win–win.
Everything Else
By everything else I mean deciding between paying off student loans, investing outside of retirement accounts, saving for a home, and everything in between. Here it's a matter of balancing what makes the most sense financially with what's important to you.
What makes the most sense financially typically depends on interest rates, both the interest rates you're paying for debt and the interest rates you would earn by investing the money. Interest rates on student loans vary widely but it's typically recommended that if the interest rate on your student loans is 7% or more, it makes sense to prioritize paying those down before investing outside of retirement accounts (which have added tax benefits).
While these are great guidelines, you can't ever be sure what your investments in real estate or the stock market will earn during the years you decide to invest and not pay down your debt. It's always important to keep your motivation in mind. If your student loans don't bother you, and you're really excited to get started investing, you might decide to allocate funds 50/50. It doesn't have to be all or nothing.
Add a priority ranking to each goal, starting with #1 (top priority) and working your way down.
| Goals | Priority |
|---|---|
| Example: Build minimum rainy-day fund | #1 |
Make