How to Manage Your Savings Goals

Presented by Dena Petersen

Coming up with a list of savings goals is easy: retirement savings, a new car, a down payment for a new home, or a child’s college education could be a few on your list. A little prioritization of your goals today can make a big difference in the future. Schwab recommends investors think about tackling multiple savings priorities at once. To make multiple savings goals feel more attainable, turn them into a series of manageable steps:

Step 1: Contribute to your company’s retirement plan up to the full match.

If your employer offers a workplace-sponsored savings plan like a 401(k), contribute at least enough to receive the maximum employer match. Whether your employer matches 50 percent of your contribution or dollar-fordollar up to a certain amount, it’s hard to beat that kind of return, even in a bull market.

Step 2: Pay off your non-deductible bad debt.

Eliminating your debt, especially the high-interest consumer debt with no tax benefits, makes it easier to reach your savings goal. If you’re carrying a balance on your credit cards or other high-interest loans, create a spending budget and look for ways cut back on nonessential expenses. Use that extra cash to pay down those expensive debts, until you’re down to zero. And always try negotiating with your credit card company or loan provider for a lower interest rate.

A handy tip to help manage debt is the 28/36 debt rule: no more than 28 percent of your pre-tax household income should go toward servicing home debt, such as your mortgage payment, home insurance, and property taxes. And no more than 36 percent of your income should go toward all debt, including credit cards and car loans.

Step 3: Be prepared for

emergencies. Unexpected situations happen. They’re never easy, but you can cushion the blow by being financially prepared. Tuck away between three to six months of essential living expenses in a savings or money market account. Your money won’t grow much in these types of vehicles, but it will be easily accessible when you need to pay bills in case of a job loss or unexpected illness. Having some cash ready for unexpected situations will help you avoid expensive and unwise alternatives like living off credit cards, being forced to sell investments at an inopportune time, or withdrawing money from a retirement savings account, which often results in having to pay early withdrawal penalties.

Step 4: Max out your

retirement accounts: Investing can help you meet your financial goals, but the amount you save and spend can count more. Try to contribute up to the IRS maximum if you

invest in a 401(k) or Individual Retirement Account (IRA): an annual $19,500 for your 401(k) and similar accounts, plus an extra $6,500 if you’re over the age of 50; an annual $6,000 for your IRA, plus an extra $1,000 if you’re over the age of 50.

For most people, the above four steps should be taken in order. Now if you have extra cash, here’s how to think about saving for some other common goals. The exact order of these might vary depending on your situation:

Step 5: Save for your

child’s education. A college education is a top priority for many families, but don’t let it detract from your retirement savings goals. Why? Your child may be able to get a low-interest loan for college, but you can’t get one for retirement. State-sponsored 529 college savings plans and Coverdell Education Savings Accounts, which both benefit from tax-deferred growth on your investment, are two common college savings vehicles.

Step 6: Save for a down

payment on a home. A good first step is to figure out how much “house” you can afford. Remember, your mortgage payment, taxes and insurance shouldn’t exceed 28 percent of your pre-tax income. Make sure you keep your risk tolerance and timing needs in mind when deciding how to save for your down payment. Also, avoid using tax-deferred retirement accounts to fund this purchase, which can drastically set back retirement savings goals.

Step 7: Pay down tax-

deductible debt. There is such a thing as good debt. Mortgages and students loans, for example, are tax deductible and can help boost your credit score if you make your payments on time. But at the same time, any form of debt can limit your ability to save. Since interest rates are still near historic lows, consider refinancing things like mortgage and student loan debt, but make sure to factor in any transaction or closing costs. You only want to refinance if you’ll come out ahead in the long-term.

Step 8: Keep investing.

Once you’ve addressed your savings goals, keep investing for the long-term. This will help you counteract the impact of inflation, and likely earn you more than what a traditional savings account would yield. Always consider your risk tolerance, but staying diversified and focused on the long-term will help you stay on track.

It is important to organize your savings goals and create a clear picture of what your priorities are. This allows you to measure your progress, adjust as needed, and ensure that you have an effective plan in place to meet your goals. Remember, the best thing you can do to reach your goal is to start saving today.

Dena Petersen is a Financial Consultant at the Charles Schwab Citrus Park branch with over 17 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.

Investing involves risk. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice.

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