Information Overload : How To Prioritize Your Savings Goals
Yesterday, while mindlessly scrolling through my Instagram feed, as I do more times a day than I would care to admit, something caught me off guard. After a few minutes of scrolling, I realized that I hadn’t seen a single picture on my feed of anyone that I actually knew. When I first created my Instagram account, I wanted to stay up to date on the lives of my friends and family. And, okay…maybe a celebrity crush or two. Fast forward a couple of years and a few things have changed. One, I am no longer madly in love with Reggie Bush. Two, my account, today, consists mostly of fashion bloggers, clothing stores and fitness experts and very little of the people in my life that I know and love.
There isn’t anything, inherently, wrong with this situation, but is it really necessary for me to follow 250 different fashion bloggers? Each day, as I scroll through hundreds, or thousands, of posts and pictures, each one tells me about a different “it” bag, a must try mascara or a tea guaranteed to produce abs in 28 days. Don’t even get me started about why the very idea of that tea is ridiculous. That’s a post for another day. My point, really, is that we are a generation overwhelmed by choice and bombarded with information.
This same confusion and information overload extends to our finances, specifically to our savings. From every direction, we hear that we need an emergency fund, but we also need to pay off our credit card debt. We need to invest in the stock market, but, rent is crazy, so we also need to buy a house. There are so many different theories about what we need to do with our personal finances in our 20's, but, just like trying to pick out a new pair of summer sandals from an Instagram feed filled with fashion bloggers, when there are too many options and opinions, how do we know where to begin?
A few posts ago, I highlighted my budget plan: the 50/20/30 method. You may, or may not, remember that The 20, or 20% of your take home pay, is allocated for your future. In my opinion, The 20 is the scariest and most unclear component of the budgeting method. When I think about funding my future and all of the big (aka expensive) dreams that I have, it’s easy to feel like I am being pulled in a million different directions and that prioritizing all of my financial goals is next to impossible. I’m sure that I’m not alone in feeling a little lost. The confusion that we all have in prioritizing our financial goals boils down to one big question:
If I have extra money (i.e. The 20), where should it go first?
My friends ask me this question ALL the time. Obviously, I’m still a work in progress when it comes to achieving my financial goals, but I do have my own answer to this question and a plan that I follow pretty diligently. I hope that by sharing what works for me, I can inspire others to prioritize their savings goals in a way that works for their lives.
To get started, determine the dollar amount that you are working with, a minimum of 20% of your take-home pay. This number is what you will be setting aside each and every month for your future priorities. Remember, this is 20% AFTER you have already contributed up to what your employer will match in your 401(k).
When it comes to financial goals, the list could go on forever: retirement, dream vacation funds, mortgages, credit card debt, stock market, etc. If you were to divide up 20% of your pay between all of these priorities, it would take forever to feel like you were making any headway toward achieving your goals. Which is the exact reason why people feel so overwhelmed.
To counteract this feeling and to prevent yourself from giving up on your goals, it is much more effective to focus your energy and efforts on 1–2 objectives at a time. Below is my game plan, one that I think caters well to a millennial lifestyle.
1) Emergency Savings Account
We’ve all heard about saving for a “rainy day.” Even if you live in San Diego, where the sun almost always seems to shine, there will be a rainy day and you need to be prepared. Your first savings priority is to build a $1000 emergency savings account. Flat tire, broken leg, room damage charge on your Vegas hotel room…whatever your “rainy day” might be, $1000 is, generally, enough money to protect you from any surprises or incidentals. It also prevents you from needing to use a credit card for unforeseen expenses.
Disclaimer: This is absolutely for emergencies. Non-negotiable. Even I have to admit, new jeans are not an emergency.
2) Pay off credit card debt.
Given that the standard savings account earns about 0.06% in interest and the average consumer credit card charges about 15.07% in interest, you are actually losing money if you choose to save, rather than pay off your credit card debt. With a $1000 emergency fund in place, you can feel confident that you are covered if any surprises come your way, and begin redirecting the money that you were saving toward your credit card debt. If you need help determining which credit card to pay off first, take a look at my debt repayment plan here.
3) Save 3–6 months worth of expenses.
Congratulations! You have already made major progress toward your financial freedom. You have an emergency savings account and are consumer debt-free! That is much more than can be said for most people in their 20's! The next priority that you need to focus on is building a nest egg of 3–6 months worth of expenses. $1000 is a great start and a surefire way to cover most incidentals or surprises, but what if something bigger happens? For example, how will you survive if you lose your job and need a few months to find your next role? I guarantee that you will need much more than $1000. A great target goal is to save 3–6 months worth of your fixed expenses. You should keep this money in an account that you absolutely cannot touch and don’t have immediate access to. I would recommend an online savings account, such as Ally or Emigrant. Not only do online savings account offer insane interest rates, sometimes upwards of 1.00%, but they also take an average of 72 hours to transfer funds to your standard checking account for use. This ensures that you won’t be tempted to dip into your savings for an impulse buy.
4) Pay off your student loans.
With the average American holding over $20,000 in student loan debt, paying off student loans is not something that will happen overnight, but it is possible! Because student loans are, generally, regarded as “good” debt (i.e. they are an investment in your future) and, typically, have very low interest rates, paying off student loans is not as important a priority as paying off credit cards. However, now that you are consumer debt-free and have a few months worth of living expenses saved up, tackling student loans is the next step. By contributing just an extra $50 a month toward your student loan payments, or whatever dollar amount your 20 allows, you can save thousands of dollars in interest over the life of your loan. Who wouldn’t want to save a few thousand dollars!? Most student loan websites have a repayment calculator that you can use to determine just how much you will save by increasing your monthly payments. In addition, paying more toward your student loans has huge tax benefits. The interest that you pay on your student loans is deducted from the overall income on which you are paying taxes which equals more money in your tax refund! Again, who wouldn’t want more money!?
5) Increase 401(k) contributions.
After you have tackled the first four beasts of financial priorities and goals, it is time to take a closer look at your retirement contributions. If you barely know what a 401(k) is to begin with, take a closer look at my previous post here. Your ultimate goal should be to contribute 10–15% of your income toward your retirement savings, even if your company will not match all of these contributions. If you can commit to this, especially during your 20’s, I can practically guarantee that you will have several million dollars by retirement, in a 401(k) alone. That sounds pretty fabulous to me.
After increasing your 401(k) contributions to 10–15% of your income, you will still have some of your 20 left to play with. Some ideas are below:
- Open a Roth IRA, another type of retirement account with different tax benefits.
- Stock — Begin by purchasing company stock at a discount or invest in a diversified mutual fund or index fund. More on this topic to come!
- Save for larger goals. Whether you hope to purchase a home, plan a wedding or take an extravagant Euro trip, you will need additional savings.
As I hope you now know, there is so much more to saving than automatically transferring 10% per month to a low-yield, big-bank savings account. Saving and planning for our futures can be a lofty and overwhelming topic, but by prioritizing our goals and focusing on 1–2 things at a time, we will all be well on our way to financial success and freedom. As always, I am, by no means, an expert on this topic, but I have found a plan that works for me. It is my hope that by sharing my thoughts and experiences, I can inspire others to take charge of their personal finances and come up with a strategy that works for them. One that still leaves a few dollars for a Sunday brunch mimosa.