You've been working hard to cut expenses and quit living paycheck to paycheck. You negotiated a raise or landed a higher-paying job.
Your side gig is creating a buffer in your budget. No matter the reason, it's time to put the extra money in your bank account to work.
But now you've got questions on prioritizing your savings goals – what should you focus on first?
Focus First on What Matters Most
Before you start saving money for your dream home, adding money to a college account for your child, or as dull as it sounds – setting aside money to put on the roof you'll need soon – focus on building an emergency fund, saving for retirement, and eliminating high-interest debt first.
With all of the factors coming into play when you talk about personal finance, discussing these together makes sense.
One financial expert says to set up an emergency fund before you worry about saving for retirement. Another will say you're giving away money if you don't contribute up to what your company matches on a 401k.
Throw in some high-interest credit card debt and what matters most really gets confusing.
Let's look at why these three goals matter more to help you determine where your savings should go. Or whether you should fund a combination of these goals at the same time.
Setting aside money for unexpected expenses or life events can help you stay out of debt. People who rely on credit cards in emergencies can find themselves paying off the balance for years.
Most experts suggest keeping at least 3-6 months worth of living expenses in a high-interest savings account you can easily access.
Others are more conservative and counter that 8 months to a year's worth of living expenses should be saved.
Should you stop working on every other goal to save up all of that money?
When you consider the length of time it could take – even to save up a few months of expenses – it might make more sense to build a small emergency fund ($1,000) right away and then consider the other two important goals.
Because honestly, the financial guru's can't even agree.
Instead, take into account your personal situation, the rate you can save, and what other support systems you have in case of an emergency.
If you start with a small emergency fund, once you've begun saving money for retirement and paid down high-interest debt, you can come back and build your emergency fund to an amount that helps you sleep better at night.
Don't make the mistake of thinking you have more important money goals. Or that you can start saving for retirement down the road.
When you're able to retire comfortably, you'll be glad you put your future first and made saving for retirement early a must.
The power of compounding interest depends on your money being invested for a long period.
If you doubt how much it matters, try this compound interest calculator from the Securities and Exchange Commission (SEC) and change the time frame to see why saving even small amounts early and often is the key to growing large amounts of money.
If you're building a small emergency fund and still have high-interest debt, start small – but start saving.
Does your company offer a retirement plan matching a portion of your contributions? Try to invest the amount of money required to get your full company match, or you'll lose “free” money.
When you can save more, work toward a goal of investing at least 15% of your income for retirement. Remember – the later you start, the more you'll need to invest.
Taking advantage of a Roth or traditional IRA might make sense before fully funding your 401k. Speak with a financial professional if you need investing advice.
If you have any credit card or other high-interest debt, it's important to understand the urgency of paying down this debt aggressively.
By paying only minimum payments, you'll be in debt longer, and you'll pay a lot more in interest than you probably think.
Experiment with this Bankrate credit card payoff calculator to see how putting some of your savings toward paying off high-interest debt will help you become debt-free sooner.
Once you eliminate high-interest debt, you can get back to growing your emergency fund, funding retirement accounts, and focusing on other personal financial goals of interest to you.
Emergency funds, retirement savings, and paying off high-interest debt are all important. It's up to you to decide how to protect yourself now and in the future, while eliminating the burden of debt that can rule your life.
Determine Your Personal Savings Goals
When you've saved enough to address the important financial goals above, it's time to start thinking about other money goals. Brainstorm a list of things you want to save for and don't hold back.
Your car will need replacing at some point. And if you don't own a home but want to in the future, add a down payment to your list. If you already own a home, do you have an account to save for major home repairs?
Are you planning to adopt a child or help support your parents financially as they age? Add it to your savings goals.
As much as some parents put college savings as a must, it shouldn't go before saving for retirement, emergency funds, or eliminating credit card debt.
Don't be afraid to dream a little too! Is taking a sabbatical to write a book a goal? Maybe an extended honeymoon in a foreign country is what you really want.
Has spending a special summer family vacation together before your oldest goes off to college what you've thought about the last few years?
Write it down and add it to your list of savings goals. Then see what you can do to make it happen.
Short- Or Long-Term Savings Goals and Their Importance
Take your list of goals and determine a time frame for each one. If your daughter is entering kindergarten and you're ready to start saving for college – it's a long-term goal.
If taking your son to visit colleges triggered the idea for a special summer vacation trip, your time frame to save is much shorter.
Some people even separate their goals into short-term (1-3 years), mid-term (4-6 years), and long-term goals (7+ years). As with many things in personal finance, divide your list into what works best for you!
After listing your goals, rank each one in terms of importance. You may quickly realize you have too many goals to save for. Or that some goals don't matter as much as others.
Trim your list or move goals to the bottom if others are clearly a priority. Just remember that naming your goals can make it easier to save for them.
Keeping money in a savings account without a plan may not motivate you to stay on track to fulfill your goals.
Where to Put Your Savings
Understanding how long you have to finance each goal will also help you determine the best place to put the money you're saving.
It usually makes sense to save for short-term goals in a high-interest savings or money market account.
Just know any money invested in the stock market and not merely saved in an FDIC insured account has the potential to be lost too.
If you're saving money for college, it makes sense to try to save even small amounts in tax-advantaged accounts when your child is young so you can benefit from compounding interest.
Prioritizing Your Savings Goals
You've probably heard some version of the saying – “when you fail to plan, you plan to fail” – and when it comes to meeting financial goals, this can definitely be true.
When you began thinking about what savings goals to focus on first, you started setting yourself up for success. Putting things off and hoping you can save for them later is a recipe for disappointment.
Goals will compete with each other. And it will be hard to decide what you can pay for and what you can't.
Failing to plan can cost you money and even add to your debt in the long run.
Take time to address what matters most first. Then figure out how to save for the goals you really want to meet. Taking a proactive approach reduces stress and will be worth the effort as you reach each goal along the way!
Vicki and Amy are authors of Estate Planning 101 – a Crash Course in Planning for the Unexpected -coming soon from Adams Media.