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Financial Goals

How to Prioritize Your Financial Goals

If you identify all your financial goals for investing, you’ll likely find you can’t fund them all at once. Get our expert view on how to start prioritizing them.

Articles by Nick Holeman, CFP®

By Nick Holeman, CFP®
Financial Planning Expert, Betterment  |  Published: January 15, 2019

“You can afford anything…just not everything.” This quote from personal finance writer Paula Pant beautifully encapsulates part of what it means to be a CERTIFIED FINANCIAL PLANNER™: To help clients define and prioritize their financial goals.

Prioritizing goals is all about deciding what future purchases you’re going to make. Which ones are most important to you? Let’s dive into why prioritizing your financial goals is so important, and how to actually get started setting your priorities in life.

Why prioritizing your financial goals is so important

Most of us do not have an unlimited amount of income. Even if you’re a high earner, you’re likely limited by how much you take in each month. Even more likely: You’re one of the 99% of people who have to manage their spending carefully in order to save each month. That means we all have to make choices about how we put our cash flow to work—whether by spending, saving into investments, or paying for immediate goals like insurance. These choices can be either intentional or unintentional.

Unfortunately, far too many of us are not intentional with our spending or our saving. And generally, that means we spend far more than we save. If something seems nice in the moment, we buy it, sometimes as an unconscious reaction. In short, it’s normal for money habits to live in opposition to our real financial goals. Figuring out how to prioritize your goals aims to align your habits with the outcomes you want to see come true.

I break the process down in just six easy steps and do this day-to-day with Betterment customers I advise over the phone. Let’s walk through an example to see how we do this.

1. Identify all of your possible financial goals

For most people, prioritizing—i.e. putting your goals in order—is actually the second order of business, because when they start thinking about it, they realize they haven’t yet articulated all of their financial goals in the first place. In planning consultations, I face this every day.

You can think of financial goals as future purchases you want to make (e.g. a home) or may be forced to make (e.g. medical costs in retirement). If you don’t save ahead of time, these might be situations where you’d otherwise have to take out future loans.

Each person’s goals are unique, so there’s no way to list all possible financial goals in this article. But here are a few possible financial goals, in no particular order, to get you thinking.

 

2. Clearly define your goals.

With your financial goals identified, it’s time to turn these vague ideas into more concrete action items. You need to know the size and scale of each of your goals. This means going beyond saying “I want to buy a house.” You should get as specific as possible.

  • When do you want to buy a house?
  • What size house do you want to purchase?

At Betterment, whenever you add a new goal to your dashboard, we prompt you to enter this information.

I know that an exact time horizon and target amount for some goals will be hard, if not near impossible. How do you know which school your child will go to? Or how much your medical expenses in retirement will be?

That’s okay, and that’s why we call this process “planning” instead of “a plan.” Life happens, things change, and you have to keep planning accordingly. You can always adjust your goals later on. So for now, I recommend making your best estimate, and reviewing your goals once per year (or more) to see if it is still accurate.

3. Rank order your goals in order of importance.

Once you have each goal clearly defined, the next step is to rank each of your goals in order of importance. Below is a loose framework to help you get started, however your exact order will highly depend on your own circumstances and preferences.

  1. Pay off high-interest debt
  2. Build a 6-month safety net
  3. Retirement
  4. Necessary expenses (car, moving costs, tithing, etc.)
  5. Wedding
  6. Home down payment
  7. Children’s college
  8. “Nice-to have” expenses (home remodel, vacation, etc.)

We recommend setting up your Betterment account with each goal you are working towards. For example, your account may look something like this.

goal priority betterment

 

4. Calculate required savings of each goal

The fourth step is to estimate how much you will need to save per month to reach each goal. Betterment will do this automatically for you when you set up your goals, but you could do it yourself if you know:

  • How much you already have saved up
  • The time horizon until your goal
  • Expected growth rate of your investments

 

Of course these are just estimates, since nobody knows exactly how your investments will perform, but this is extremely useful from a planning perspective. At Betterment, we run calculations to to predict how likely different investment outcomes are. Our recommended savings amount is enough to have a 60% chance of reaching your goal.

If you have a goal that is either extremely important, or has an inflexible timeline, then it may be wise to save a bit more, just in case markets have lower than projected returns. That is why we also show a range of different outcomes, so that you can tailor your planning.

5. Waterfall your way down

Let’s say that you’ve done steps 1-4 for each of your goals, and you’ve determined you need to save the following amounts to reach each goal in its desired time horizon:

  • $300 / month towards your Safety Net
  • $600 / month towards Retirement
  • $150 / month towards your Kid’s College
  • $250 / month towards your Home Down Payment
  • $100 / month towards your Play Account

This is a total savings of $1,400 / month. Now that you have your goals prioritized, you know exactly where your first dollar of savings should go. In this example, that is your Safety Net. Once you fill up that monthly savings bucket, work your way to your second goal. Then your third, and so on. We call this your “savings waterfall.” Even more powerful is setting up an auto-deposit so that your savings happens automatically.

6. Adjust your goals as necessary

Now one of two things will happen.

First, you may find yourself able to save enough money per month such that you are likely to reach all of your goals. Congratulations! Maybe it’s time to get ambitious and upgrade some of these goals (retire earlier or send your kid to private school), or even develop additional goals (donate to charity or purchase a vacation home).

Or maybe you can’t afford to save that total monthly amount. That’s okay, and is actually far more common than the first scenario. Work your way down the waterfall, saving as much as you can. At least you know that you are starting with those goals that are most important to you.

Luckily you have multiple “levers” you can pull to adjust your goals and get back on track:

  • Save more now (save an extra $150 per month towards your home goal)
  • Delay your goal by a few a years (buy a home in 7 years instead of 5)
  • Reduce the cost of your goal (buy a $500,000 home instead of a $600,000 one)
  • Some combination of all 3 (most likely)

You can use preview mode when you’re logged in to Betterment to see how these changes might affect your goals and come up with a personalized plan that can work for your budget and goals.

Prioritizing your goals is critical to any plan.

Prioritizing your goals is critical step in developing your personalized financial plan. At Betterment, we allow you to

  • Set up buckets for each of your goals
  • Plan for how much you need to save to reach each goal
  • Set up automatic deposits towards each goal
  • Adjust each goal to fit your needs

We hope that by offering these sophisticated tools, we can help more people reach their financial goals.

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