How Should You Prioritize Your Savings Goals?

4 min read
July 02, 2014

Most of us are working towards more than one savings goal at a time. After all, there's a lot we want to accomplish: building our nest egg for retirement, creating cash reserves for emergencies, saving up for a big purchase like a home, putting away money for a child's college education, trying to pay off the mortgage... the list goes on and on.

Of course, the trouble is that we only have so much money left over after the bills are paid.

With so many savings goals to achieve, how do you know which to prioritize?

Figuring Out Your Biggest Savings Goals

Many people will have three big savings goals they want to work toward:

  • Retirement
  • Kid's college education
  • Paying off a mortgage

All of us need to worry about retirement. But saving for your kid's college or paying of a mortgage won't apply to everyone. If that fits your situation, then you should hit your retirement savings goals hard.

Doing so will allow you to build a substantial nest egg for your future -- and may even get you to financial independence in the next ten or twenty years, depending on the rate at which you invest.

But don't forget: even for members of Gen X or Gen Y that don't have children and don't have a mortgage, your emergency savings are as crucial to you as they are for everyone else. Be sure to sock away at least three to six months' worth of expenses into a liquid account (look for a high-yield savings account, so you at least earn a bit of interest).

Once those two big needs are taken care of, your savings goals should align with your values. So if you want to travel around the world, set aside 10% of every paycheck to make it happen.

And for those of us who do have children and a mortgage (or want either)? Here's how to prioritize those three big goals that all seem equally important:

Emergencies and Debts First

....If you have your emergency fund established and your consumer debts from credit cards or student loans paid off, that is.

The more financial responsibility you have -- like dependents or regular monthly payments on a variety of bills -- the more important it is that you get your emergency fund in place.

Once you have that financial safety net, make a plan for paying off your debts as soon as possible. Allocate most of your discretionary income each month to debt repayment until it's eliminated.

Most of your discretionary income, not all. You should still set aside some amount for your retirement -- probably whatever percentage your employer will match if you have that option. And put something small (maybe 5%) towards that emergency fund if it's not funded yet.

Take Care of Your Retirement Savings

Once that financial foundation is laid where you have a safety net to protect you from unexpected expenses and debt is no longer holding you back, it's time to get serious about those three big savings goals that many of us struggle to prioritize.

First on the list: your retirement savings.

It may be tempting to save up for a home (or to pay your current one off) or to stash away cash into a fund for your kid's college education. But you can't take care of anything unless you take care of yourself first.

You won't do your children any favors if you provide them a Bank of Mom and Dad scholarship -- and then have to move in with them in your 60s or 70s because you didn't save for retirement.

Likewise, you may not have to deal with a mortgage payment but it may come at a cost of working years more than you needed to because you diverted so much cash away from your retirement savings.

So secure your own financial future before worrying about anyone else's, and make saving for your retirement goals your top priority.

Pay Off Your Home (Maybe)

If you know, without a doubt, that you're already in the home you want to spend the rest of your days in, then paying off your mortgage should be your next savings priority.

Paying off your mortgage makes sense if you plan to live in your current home for decades and you'd like to eliminate a big expense before you retire.

But use caution: paying off a mortgage doesn't make good financial sense for everyone.

Before throwing cash into your home by paying down your mortgage as quickly as possible, talk with your financial advisor if any of the following applies to you and your situation:

  • You have a low interest rate on your loan
  • You don't plan on living in the home for more than 15 years
  • You're behind on meeting your retirement goals
  • You're considering renting out the residence

It sounds a little counter intuitive -- especially if you've been told all debt is bad debt no matter what, end-of-story -- may not be the smartest money move to pay down your mortgage loan.  Again, speak with your advisor to determine the right course of action for you.

Save for College Expenses

Yes, saving for your kid's college is last on this priority list for a reason.

In fact, it may even come in further down on your personal list, depending on how many other savings goals you have.

That's because your kids can help pay for their education. And there are programs, grants, and scholarships they can earn that provide funding for that education.

You can't say the same for other goals; no one is going to give you money for you retirement or to pay your bills.

You can still help your children with their college education. But you don't have to pay every last cent of the bill. They can help by earning good grades and scholarships, working part-time jobs, and researching grant programs they qualify for. You can also help them research reasonably-priced schools in state rather than halfway across the country.

When they're old enough, be honest about the expectations. They will have to help pay their own way in some form or another.

What's your rationale for how you prioritized your own savings goals?