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The final step toward financial security varies from person to person. You can choose the next financial goal to pursue after
Depending on your choice of goal, you can accomplish multiple over the years. You can, and likely will, pursue more than one goal at a time. How you prioritize is up to you & your family and will depend on what you value.
Now is the time to loosen your budget if you can and want to because these bigger goals will probably take years to accomplish. Your retirement contributions need to continue running in the background, but you can now save the money that was formerly spent on debt payments.
Next Financial Goal Suggestions
- Increase emergency fund to 12 months’ expenses
- Save for your children’s college education
- Pay off your mortgage
- Max out retirement contributions
- Save up for a large purchase – new vehicle, down payment on a home, home improvements, vacation, etc.
- Pursue financial independence
Don’t let this list overwhelm you. You can pick & choose your approach now, but don’t expect to do everything. Don’t expect to do everything all at once either. Make a plan and get to work.
Remember, you can attack two or more financial goals at a time. Making a plan and incorporating it into your budget will help keep you on track long term.
Special needs families’ next financial goal: Save 12 months’ expenses
If you have a child with special needs, I strongly recommend building your emergency fund up to 12 months’ expenses. You know you’re going to have out of pocket expenses for medication, treatments, equipment, therapies, and doctor visits. There will be hospitalizations, hotel stays, and restaurant meals. There may come a time when one or both parents are unable to work due to their child’s medical needs. Having a large emergency fund will help cushion the blow of any of these situations.
Even if you have typically developing children, or no children, increasing your emergency fund is a valid next financial goal. There are so many ways this money could come in handy & keep you out of debt. I recommend a larger emergency fund if you are a single income household (whether one parent stays at home or you’re a single parent), if your job situation is less stable, or if you have large assets (house or vehicle) that may need significant repairs or replacement soon.
The nice thing about an emergency fund is that it can be used for a variety of purposes, as long as you and your partner agree that this is an appropriate use of the money. Communication is key.
Saving for college
This article at Investopedia lists estimates of future annual college costs. It’s depressing, to say the least. It’s important to remember that loans can be obtained for higher education, but not for living expenses during retirement… so if you have to choose between your kids’ college and your retirement, put yourself first.
A 529 plan is a tax-advantaged savings plan specifically for higher education costs. Earnings and distributions are tax-free, as long as the funds are used for qualified educational expenses. The contributions are taxed before going into the account, so they do not reduce federal taxable income in the year the contributions are made. State tax deductions may be available.
There are limits on how much can be contributed each year, but it’s pretty high ($15,000 in 2021). If the student doesn’t use all the funds, it can be transferred to another child, to the parent/owner of the account, or a 529 ABLE account for those with disabilities.
Until learning that a 529 ABLE account is an option, I had never considered using a 529 account to save for my oldest daughter’s future. I don’t know if she’ll be able to attend a traditional university, so I didn’t want that money to be penalized. Rolling over to an ABLE account is the perfect solution.
529s can function in two ways. A college savings plan acts as a regular investment account. Each state administers its own 529 plan and you can choose which state’s plan you use, even if you don’t live in that state. Prepaid tuition plans are less common, and allow you to pre-buy tuition at today’s rates, locking in the lower rate.
A Coverdell Education Savings Account (ESA) is similar to a 529 plan. Contributions grow are not tax-deductible and grow tax-deferred. There is a 10% penalty if the funds are not used for qualified education expenses. A Coverdell can be used to pay for K-12 expenses, in addition to college tuition. The annual contribution limit is only $2000 per recipient though.
Both traditional and Roth IRAs can be used to fund college expenses for the owner, spouse, or children before the owner reaches age 59.5. Usually, withdrawing from an IRA before 59.5 results in a 10% penalty, but if the funds are used for college fees the penalty is waived.
The drawback to using your IRA to fund a college education is that the money is not available for your retirement, and it’s not earning interest in the meantime. I do not recommend using this method for funding college.
If your child is earning some type of income, even from a parent-owned small business, they (or you, the parent) can contribute to their own IRA account that year. They could then use that money to pay for college.
Pay off your mortgage
Yes, paying off your mortgage is usually a huge goal. It will take a long time. It will take continued focus. The biggest benefit of paying off your mortgage early is the huge amounts of cash it will free up each month. That extra money will make your retirement easier when the time comes.
The simplest way to pay off your mortgage early is to pay an additional amount each month. This will reduce the outstanding balance each month, less interest accumulates on that smaller balance, and therefore you pay less interest over time.
If you are following my method of saving for recurring expenses, you are already putting aside a portion of your mortgage cost from each paycheck. If your mortgage processor will accept bi-weekly payments, take advantage of that. Making a payment every two weeks (26 payments per year) is the equivalent of making 13 payments per year, so you are making an extra payment each year.
Another method to get rid of your mortgage is a refinance, depending on the interest rates available. If you can reduce your interest rate by at least 1%, refinancing may be a good option.
You can also look at decreasing the loan term. A 15-year mortgage will likely have a higher monthly payment, but it’s obviously a significantly faster payoff plan than a 30-year mortgage.
NerdWallet has an easy-to-use early mortgage payoff calculator that will give you an idea of how much extra you have to pay each month to hit your target payoff date. It’s important to remember that paying your mortgage off in 15 years instead of 30 years doesn’t require doubling your monthly payment, because of the interest. When I used the calculator, paying my mortgage off in 15 years would only take an extra $600 a month (and our payment is more than $600).
Max out retirement savings
If you’re behind on retirement savings and have a higher income, maxing out your retirement contributions is a possible financial goal. Using the table below, you can review your budget and determine if the monthly necessary contribution is feasible.
|Account||For||Contribution Limit (2021)||Monthly Contribution to Max|
I’m a big believer in saving as much for retirement as possible, but starting to save early can help avoid the need to max out your annual retirement contributions. According to online calculators like Chris Hogan’s R:IQ, my husband and I are on track to have enough saved for retirement, even though we’ve never saved 15% of our income. Starting to save early is the key.
Additional financial goal: Save for large purchases
You’re going to need a replacement vehicle one day unless you have great public transportation available. You’ll probably want to take a vacation or remodel your home. If you’re still renting, you may want to buy a home one day, so you need a down payment.
These are all potential financial goals for your next step. Don’t make too many big savings goals at once, so you can focus on and make progress toward your goals. Spreading yourself, and your money too thinly will dilute your efforts.
This is also an area that you need to practice balance in. You can’t do all the things at once. Focus on one or two large goals at a time, and maybe you can also work on a smaller goal, like a vacation.
Dave Ramsey advocates for paying cash for all vehicle purchases and home improvements. That’s a great goal, although possibly unrealistic in some situations. He recommends driving a cheap beater car until you can save enough to buy a slightly less sketchy mode of transportation. Continue to upgrade little by little, saving for the next vehicle as you go.
I agree that a vehicle purchase or home improvement is not usually an immediate necessity, but there are exceptions. We took on additional debt to remodel our home, to make it wheelchair accessible for my daughter. While we could have paid off debt, then saved for the remodel, it would have taken at least 5 years. By that time, I won’t physically be able to carry her into the house. When I was pregnant with my second, I couldn’t carry my oldest. I’ve had injuries that have prevented me from safely transporting her… so that debt has been well worth it to our family.
We will need to purchase a wheelchair accessible vehicle in the next year or two when my daughter moves to a larger, heavier wheelchair. While a vehicle is expensive, a ramp or lift makes it extra costly. There’s literally no way to pay down our debt and save that huge amount in this amount of time, so we will have to get another vehicle loan. My husband and I both put our daughter’s safety and comfort before arbitrary financial “rules.”
Pursue Financial Independence
I’ve talked about Financial Independence vs Financial Security before. I still think security is a more reasonable goal than independence for a lot of people. If you are lucky and dedicated enough to reach financial security, then financial independence isn’t a stretch anymore.
Financial independence is:
- having enough money
- in investments of some sort
- to pay for your living expenses
- without working, unless you want to
There are a lot of resources to help you figure out how much to save and invest to get to financial independence. There’s a large community online of like-minded individuals who share their journeys and provide inspiration.
FIRE is another option – Financial Independence, Retire Early. The “retire early” part requires more intensity and an earlier start than just financial independence. You can craft your journey to meet your needs, your goals, and your family.
Achieving your next financial goals will be a long process, so make sure that your budget allows you to make progress on your goals and live your life. Be reasonable, but enjoy yourself.