Setting specific financial goals is often the first essential step toward achieving your dreams. After all, if you don't have goals, you won't know what to do with your money -- and you won't know if you're on track to be prepared for important life milestones such as retirement. Unfortunately, it can be hard to figure out exactly what goals to set.
While everyone has their own objectives in life and their own unique financial priorities, there are four big savings goals most everyone should have for themselves. Here are those four goals, along with some tips to help achieve them.
1. Save for retirement
Living on Social Security alone is neither practical nor desirable, as Social Security income will provide just enough money to stay above the poverty level. Since pensions with guaranteed income are few and far between, you have only yourself to rely on when it comes to supplementing Social Security benefits. That means you need to set a retirement savings goal so you can build the nest egg you need to be comfortable.
There are lots of different ways you can estimate the amount you need for retirement. You could plan to save 10 times your final salary, or aim to build enough of a nest egg to replace at least 80% to 90% of the income you were earning right before retirement. For most people, these methods of figuring out an exact retirement savings number can be pretty complicated, especially if you're decades away from retirement.
It can be easier instead to just save a big enough percentage of your current income that you're likely to amass the funds you need as a senior. While experts traditionally recommended saving 10% of income, this probably isn't enough thanks to longer life-spans and other economic factors. Instead, set a goal of saving 15% of income for retirement.
This goal is easy to measure, and it's also pretty simple to work up to achieving it. If you're saving up 6% of income now, simply increase this percentage upward until you hit the 15% mark. You can do this gradually if necessary, inching up your savings by a percent or two. You likely won't notice much difference if you slowly increase the amount you contribute to a 401(k) or IRA. And whenever you get a raise, you can bump up your savings by a big amount. If you get a 2% salary boost, you could bank your entire raise and up your savings to 8% of salary.
2. Save an emergency fund
Everyone needs an emergency fund. After all, something is certain to go wrong at some point -- and it will probably cost you money when it does. You don't want to rely on your credit cards or raid savings accounts for other goals when an unexpected expense happens, so you need a dedicated fund just to pay for these bumps in the road.
Ideally, your emergency fund will be big enough to cover three to six months of living expenses. If you're the sole breadwinner, have little job security, or have health issues, err on the side of caution and save enough to cover six months of expenses. If you're super healthy, could get hired quickly, and have a spouse with enough income to keep you afloat, you could settle for a fund to cover three months of expenses.
It can take time to save this much money, but budget as much as you can for emergency fund contributions until you hit your goal. If you're working on paying down high-interest consumer debt, though, you may wish to save up a baby emergency fund of around $500 to $2,000 (depending on income) and then devote extra cash to debt repayment. Once you've got your debt paid down, switch to concentrating on building up your emergency savings.
3. Save for big purchases
Cars, vacations, new appliances, a new home -- all of these things are purchases you may want to make at some point and probably can't afford to fund out of a single paycheck. You don't want to borrow for a big purchase or put off buying a home forever because you don't have a down payment. So, set a goal to save for the big things you want to buy.
You can actually have separate dedicated savings accounts for each big purchase you hope to make in the future. Decide how much money you need for each buy, figure out your timeline for when you want to purchase, and then budget an appropriate amount each month so you'll have the cash you need when the time comes.
By taking this approach this, you can avoid paying interest on most purchases and can save up a 20% down payment for a home to avoid paying private mortgage insurance costs. You'll save a fortune and can make purchases guilt-free because you'll have the money earmarked for just that expense.
4. Save for college
If you have kids, chances are good you want them to get an education. Unfortunately, schooling can be extremely expensive. And, even if you're OK with making your kids take out student loan debt, there are caps on federal student loans. While you or your kids could potentially take out private student loans to supplement federal aid, this can make going to school even more expensive.
Starting to save when your kids are young could at least reduce the amount they have to borrow, even if you can't fully fund their schooling. And since many parents end up borrowing or co-signing and sharing responsibility for their kids' debt, saving for college can also help you to protect your own financial future.
You can save money in a 529 plan to score tax breaks for college investing or look into prepaid tuition plans if you have a pretty good idea of where your child will go to school. You can also ask grandparents and other relatives to contribute to these accounts in lieu of gifts your kids will likely outgrow quickly.
There is one caveat, though. You should not compromise your own retirement savings to set aside money for college. Funding your retirement accounts comes first and saving for college is a good goal only if you have money left over after preparing for your future.
Set these savings goals today
When you establish financial goals, you can easily track your progress. And you can make sure you're using money on things that are meaningful to you and that add real value to your life. Start by setting these four goals for yourself today if you haven't already achieved them. When you can check these items off your to-do list, you'll have a lot more financial security, and you'll be glad you made the effort.