As a financial advisor, one of my most important responsibilities is to help my clients identify and reach their financial goals. And for many of us, setting financial goals is relatively straightforward. For example, we know we want to retire by a certain age, buy a long-term care insurance policy, or upgrade our home. However, knowing how to prioritize your financial goals isn’t always so clear-cut. For example, should you pay down debt first or contribute to retirement savings? If you’re not sure where your next dollar should go, here are a few rules of thumb I like to follow.
#1: Pay Off Debt Prudently
Debt, if used wisely, can enhance your financial plan. After all, few people can afford to pay cash for a home! If you have a low mortgage rate, there is no harm in paying it down over time; plus, there are tax benefits if you itemize.
On the other hand, paying off high-interest debt should be your top priority since compound interest can work against you. If you have credit card debt, for instance, try paying it off as quickly as possible so you can focus on other financial goals.
#2: Build an Emergency Fund
Everyone should strive to have a cash reserve in case of unexpected expenses or financial setbacks. We all experience those surprise home or auto repairs and medical bills. Unfortunately, some of us may also experience a sudden job loss. In these instances, it’s better to have cash on hand than rack up debt.
If you have a secure job, a good rule of thumb is to save enough money to cover six months’ worth of living expenses. However, if you’re self-employed or work in an economically sensitive industry, you may want to save a year’s worth of expenses. Although interest rates are low currently, keeping your cash reserve in a high-yield savings account can offer a boost over traditional checking and savings accounts.
#3: Max Out Qualified Retirement Plan Contributions
If you have an employer-sponsored retirement plan like a 401(k) or 403(b) available to you, contribute as much as you can based on your income and other expenses—assuming you have no high-interest debt and you’re also contributing to your emergency fund. Furthermore, if one of your benefits is an employer match, be sure to contribute at least enough to take advantage of it. Otherwise, you’re leaving money on the table.
Once you max out your retirement plan contributions, consider contributing to an individual retirement account (IRA). If you meet the income qualifications to contribute to a Roth IRA, you can always withdraw your contributions tax- and penalty-free if you need the money.
#4: Consider a Health Savings Account (HSA) If You Qualify
Lastly, take advantage of an HSA if you have a qualifying high-deductible health plan. HSAs offer triple tax savings since contributions, growth, and withdrawals are tax-free if you use the proceeds for qualifying healthcare expenses.
In addition, HSAs have no withdrawal requirements. That means you can let your contributions grow tax-free for medical expenses in retirement if you don’t need them in the meantime.
A Trusted Advisor Can Help You Prioritize Your Financial Goals
While these rules of thumb apply in most situations, everyone’s financial circumstances are unique. A trusted financial advisor can help you set and prioritize your financial goals, so you can feel confident your next dollar is going to the right place.
If Curtis Financial Planning can help you develop a financial plan that enables you to achieve your financial goals, please get in touch. We’d be happy to hear from you.
CNBC recently interviewed Cathy Curtis about her tips for prioritizing financial goals. If you’re interested in learning more, you can read the full article here.
