If you have money troubles, understanding your priorities and setting financial goals are key to turning things around so you can get on a firm financial footing that will continue into retirement. While this sounds logical to most, more than 1 in 5, or 21%, of Americans don't save any of their annual income.
That's according to a new survey from Bankrate.com, which asked 1,000 working American adults how much of their annual income they set aside for retirement, emergencies and other financial goals.
As a result, many Americans are struggling: A 2019 report from the Financial Health Network revealed that only 29%, or 73 million Americans, say they are financially "strong," meaning they are spending, saving, borrowing and planning in a way that will allow them to be resilient and pursue opportunities over time; 54%, or 135 million individuals, are "coping," meaning they are struggling with some, but not necessarily all, aspects of their financial lives; and 17%, or 43 million Americans, say they are "vulnerable" — that is, struggling with all, or nearly all, aspects of their financial lives.
Millennials — in particular, those ages 23 to 38 — have a hard time saving due to high credit card bills, stagnating wages and student loan debt. This age group has racked up an average of $27,900 in personal debt, excluding mortgages.
How to set financial goals
"There is no cookie-cutter method," said Douglas Boneparth, president and founder of Bone Fide Wealth, explaining that setting financial goals is a very subjective undertaking that requires an intimate understanding of your own finances.
To start, assess your income, expenses (including income taxes) and net worth and envision where you hope to stand in the future. Then split your financial goals into two categories: short term and long term.
Short-term goals are the more immediate expenses that you can square over the course of a few months or a few years. Long-term goals are those that take between several years and sometimes decades to achieve. These far-off goals typically entail more money and ongoing attention. However, depending on a person's financial well-being, Boneparth said some of the short-term and long-term goals can overlap and fall into a gray area.
Here are some examples of short-term and long-term goals that are important for anyone who wants to become more financially secure now and in the future.
Short-term goals
Paying down credit card debt. Nearly 55% of Americans who own a credit card have credit card debt according to a study conducted by CNBC and Morning Consult. Further, those who carry a balance have $4,293 of credit card debt on average.
It is important to pay your credit card statement balance every month and to avoid just paying the minimum. Americans paid banks $113 billion in credit card interest in 2018 and were on track to pay $122 billion in 2019 according to a Magnify Money analysis. Everyone should try to avoid these fees.
Managing rent. Whether you are renting a house or an apartment, paying your rent will take over a big chunk of your budget. The general rule of thumb set by the U.S. Census is that your rent, including utilities, should be around 30% of your income. Spending more than this amount can be a burden.
Building an emergency fund. Having an emergency fund is an often overlooked short-term financial goal. In fact, 28% of American adults have no emergency savings, according to Bankrate's Financial Security Index. To prepare yourself for the unexpected, such as a layoff, car trouble, a dental emergency or a costly home repair, financial planners recommend you set aside at least three to six months' worth of living expenses. Putting at least $25 a week into an interest-earning bank account can quickly add up.
Paying off a car loan. As of Q3 of 2019, auto loans accounted for 9.5% of consumer debt, according to the New York Fed Consumer Credit Panel. Also, auto loans for new vehicles take six years to pay off, on average. Needless to say, cars can be one of the most valuable things a person owns. Having a strategy for paying off auto debt is a key part of most people's finances.
Funding a home improvement. Home improvements can wreak havoc on your budget and often come with hidden costs. Although more often that not these improvements increase your home's value, it's important to not get in over your head. Separate the needs and the wants. Focus more on better functionality rather than fancy appliances and expensive decor. And be sure to investigate all the various options to fund your project. Taking out a home equity loan, doing a cash-out refinance or getting a personal loan are just some of the possibilities. Asking a financial planner which choice is best for you could save you thousands in the long run.
Long-term goals
Paying off student loans. According to the National Student Loan Data System, outstanding federal student loan debt reached $1.5 trillion at the end of 2019. And for the 44.7 million Americans with student loan debt, keeping up with these payments can have a massive impact on quality of life. Depending on how much you owe, paying off a student loan could take anywhere from 10 years or longer. But making additional payments each month can increase your savings and shorten the length of the loan, possibly turning this into a short-term financial goal and freeing up your money to save for a long-term goal. For example, on a student loan with a current balance of $10,000, an interest rate of 8% and a repayment term of 10 years, says Sallie Mae, you'll end up making 119 payments of $121.32, with a total of $14,556.97 out of pocket. But if you make an additional payment of $20 per month, you will pay off the loan in eight years and one month, with a total of $13,573.82 out of pocket.
Building a retirement nest egg. Due to the magic of compounding, organizing your retirement savings early can pay off big-time. Perhaps the best way to begin saving for retirement is to start contributing to an employer-sponsored 401(k) plan. Eighty-one percent of full-time workers participate in their company's 401(k) plan, according to the TransAmerica Center for Retirement Studies.
However, Boneparth says there is a lot of guilt placed on millennials centered around retirement savings. The financial planner advises that before young people think about retirement, they should first build a cash reserve. Short-term goals, like paying off credit card debt and creating an emergency fund, are just as important for young people. Once these short-term expenses are taken care of, then you can begin earnestly saving for retirement, Boneparth says.
Paying off a mortgage. For most Americans, buying a home is a top priority. In 2019, 33% of all home buyers were first time buyers. Meanwhile, 32% of Americans plan to purchase a home in the next five years. But, for many prospective home buyers, money is the biggest barrier. Still, 64% of households in the country are owner-occupied, which means coming up with the cash for down payments and paying off home loans is a large part of most people's finances. Staying up to date with these payments should be a big portion of any budget.
Saving for baby. Getting ready for the birth of a child involves a variety of costs that every expectant parent should be aware of. Chief among them are the health costs associated with a new child. It is important to be ready for these costs by purchasing insurance and even enrolling in a high-deductible health plan. There are online tools available that will help you calculate the exact costs of having a baby.
Paying for college. Saving for your child's higher education is something you should begin when they are very young. One way is to open a 529 college savings plan immediately after your baby is born. These plans provide tax-free growth and withdrawals for education spending. Saving for your child's tuition can be an important long-term financial goal but shouldn't be prioritized over other goals, like retirement savings.
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