As I grew to understand the importance of saving and the type of safety net this creates for my family and I, I’ve become more strategic with my methods and how I am prioritizing the purpose of every dollar that I am saving. I created 5 ways to prioritize and to give purpose to my savings. The key to making this all happen is to live below your means and to stay committed to your budget.
3 Month Emergency Funds
The good ol’ emergency fund! The first priority I set myself was to fully fund the safety net for my household. This fund should have at minimum 3 months of living costs saved in a money market savings account or in a high-yield savings account. Since there is going to be a lot of cash in this account, make sure you have it in an interest earning account.
I can tell you that on a personal basis there was an immediate sense of relief and satisfaction knowing that I’m covered in case anything were to occur in my life! So, make this priority #1.
Invest in Your Future Self
Retirement may seem very far away and for me it certainly does…However, the sooner you begin to save for retirement the greater returns you may potentially receive due to the decades of consistent and increasing contributions plus the compounding interest! My rule of thumb is to save at least 10% of your monthly income and contribute it to an employer 401(k) or 403(b) plan, ROTH IRA, Traditional IRA, or Health Savings Account.
It’s tough to save for retirement, but this is an investment you’ve got to make yourself and be blindly committed. Your 60 or 70 year old self (or whenever you decide to retire) will be very appreciative to have a huge savings account to support a decent standard of living and have enough to cover your medical expenses.
Also, by making retirement contributions, it definitely teaches you to live below your means – a very valuable lesson.
Pay Down Your Debt
As you are building your emergency fund and contribute to your retirement accounts, it’s important to pay down your debt and to be aggressive as possible with this. My wife and I have student loans and a mortgage and it can seem overwhelming. However, we are keeping our eyes on the prize (financial freedom) and that is what motivates us to make more than the minimum payments and to live below our means.
Short Term and Long Term Goals
Truth be told, nobody wants to live their life just working, saving, and paying down debts. Some short term goals I had in most recent times were to save for my wedding, to purchase a home, to splurge on shopping sprees, and to enjoy yearly vacations with my wife, family, and friends. Just make sure that your short term and long term goals don’t impede on building your emergency fund, your retirement and paying down your debts.
6-12 Month Emergency Fund
A 3 month emergency fund is a great start for anyone beginning to build their financial stability. Now, once you bring to the equation higher living costs, a larger home, a spouse, children, and possibly taking care of your parents then you will need to consider stepping up your game with a larger emergency fund. A larger household and a higher standard of living will require an emergency fund with 6-12 months of living costs saved up. Sounds crazy, but I can tell you that it is not impossible.
You and I have different financial goals and are in different phases in our financial stability. Take a deep look into your current financial circumstance and set priorities and a purpose for your strategy and for every dollar you make. To begin, do not overlook your emergency fund and paying down your debt as your top priorities – these 2 would be a great start!