I have a frequent and pleasant daydream in which the Virginia lottery board calls and says, "Congratulations! You've won the highest jackpot ever! Mrs. Brokamp, would you like to take that in a lump sum or divided up over 30 years?" This is truly the stuff of fantasy, though, particularly because I don't buy lottery tickets. Much more realistic for my family is what to do in the face of too many important financial goals and too little money to fund them all.
For example, we have:
- Several children to send to college.
- A retirement to plan.
- The desire for an extra large emergency fund.
In addition, our 1994 Honda Civic and 2000 Dodge Caravan will someday go to the great junkyard in the sky, leaving us scrambling for replacements. And somewhere along the line, we'd like to take a trip to China when our youngest (who was adopted from Jiangsu province) is old enough to remember it.
How does the average American family meet these kinds of goals? And which should take precedence if you can't contribute to them all? If you have similar questions and concerns, here's how you can set about prioritizing your goals:
Goal 1: Emergency fund
If you can accomplish only one of your goals, this is it. Saving at least $200 to $300 a month in a high-yield savings account would be a good first step. Your emergency fund should include enough money to pay for three to six months' worth of basic living expenses (rent or mortgage, utilities, medical bills, groceries, and the like).
Don't let the large sum intimidate you into not saving; set a goal of having your emergency fund fully funded within three years. If your initial goal is to save $10,000, it'll take just $278 a month for 36 months to reach that milestone.
In a true emergency, you can rely on credit cards. But if you can't pay off that debt soon, you'll quickly find yourself going backward financially. Better to have the money squirreled away for a stormy day and to pretend it doesn't exist until disaster strikes.
Get creative: Make a deal with yourself that any "found" or windfall money will go to your emergency fund. Whether it's a tax refund check, cash back on a credit card, or a gift check from great-uncle Joe, deposit it immediately in your savings account. Hold a yearly yard sale with all proceeds to go to your retirement fund.
Goal 2: Retirement
Second (or even better, concurrently), fund your retirement, especially if your contributions to your work plan are matched by your employer (that's free money -- plus tax breaks -- that you shouldn't pass up). If you don't save for retirement, you won't be able to retire.
Get creative: Once a debt is paid off (for example, the $185 a month you pay on your college loans) continue taking out $185 but now designate it for retirement. That's a painless way to bulk up your savings.
Save for a car
You should also set aside money for car savings if you can, but if you don't have a lot of cash on hand, you can borrow at fairly low rates. There are, of course, ways to save on your car purchase to make your money stretch farther. The Motley Fool's comprehensive series on buying a car offers such strategies for saving a bundle -- including negotiating tips, identifying the "right" price, and getting the most features for the least expense.
Your car savings may get mingled with your emergency stash, but try to at least keep them separate in your mind -- i.e. don't see the entire account as a way to get a much nicer car, rather than a modest car + the peace of mind that comes from a well-stocked emergency fund.
Get creative: Cut one of your household perks: switch to a lower tier of cable or cancel altogether, cut your lawn yourself, reduce your cell phone charges, or go out to eat less. A savings of just $5 a day adds up to a nifty $1825 in one year.
Save for college
It may feel disloyal to many of you to put your children's higher education funds close to the bottom of the list. After all, we're used to putting our kids' needs first in most every other way. However, think about it this way:
- An emergency requires that you access money because you so desperately need it. Taking money out of a college account such as a 529 savings plan means that the earnings are taxed as ordinary income, plus you'll be slapped with a 10% penalty.
- If you don't save for your kids' education, they aren't out of luck; there are scholarships and loans that can fund their higher education needs. No such resources are available if you didn't save for your retirement; you can't borrow your way into a retirement income, and there aren't Golden Years scholarships.
Get creative: If you'll be using a credit card anyway, why not sign up for a Upromise or BabyMint credit card that lets you save for your child's college education while you spend? When you use these cards at participating merchants, you'll get a small rebate deposited into a 529 savings account for your child. Grandparents can sign up too and link their cards to your child's account. Register before you shop for the winter holidays!
Goal 5: Vacation fund
As a mental-health therapist, it pains me to put this at the very bottom of the list. After all, a well-balanced life includes relaxation and fun, especially in today's fast-paced world. Time away can help you put things into perspective and help your cares melt away. But the hard truth is that a vacation is a luxury that someone without an emergency fund can't really afford to take. That doesn't mean you shouldn't go for a cheaper version of R & R, however.
Get creative: Designate your change jar as "fun money" and design a vacation plan around it. If you have just $200, you may be heading for your sister's house for a weekend of videos and popcorn. With a little more, you may be able to plan a trip that doesn't involve quite so many relatives. The Fool has some great tips for budget travel.
In an ideal world, all of us would have enough money for all of the things we want to do. But if your real world involves making tough choices, start with establishing an emergency fund and follow this roadmap all the way to financial security.
This article is adapted from the Motley Fool GreenLight "Money Answers" archive, which features more than 100 articles on personal-finance topics from taxes to credit to beginning investing, organized by subject and life stage. For access to this content plus the current newsletter, back issues, members-only discussion boards, and advisor blogs, take a free 30-day trial to GreenLight today!
Fool contributor Elizabeth Brokamp writes a weekly column, " Ask Mrs. Riches ," on money and relationships. Her charming other half is The Motley Fool's own Robert Brokamp (TMF Bro), editor of Rule Your Retirement. The Motley Fool has adisclosure policy.