Which goals do we save for first?

The other day I wrote a post on what debts we should pay off first. I then started to think about what to start saving for once debts are paid? I have come up with a priority list as a general guideline of how we should earmark our monthly savings. This list makes sure we are on the right track to reaching our financial independence.

Savings Priority List:

  1. Emergency Fund - Their are many schools of thought on how much this should be. It varies based on your situation but the best general guideline I found is 6 months worth of your average take-home pay saved. This is the most important. This trumps even retirement savings!
  2. "Escrow" Expenses: These are irregular expenses such as bills that come once or twice a year. They include insurance, taxes, association dues, and many others. Work out a monthly amount to set aside for when the bill(s) comes due as part of your monthly budget. Use a savings or money market account to earn a little interest while the money sits there.
  3. Retirement: The amount you save depends on how much you will need during retirement years. See my priority list of what type of retirement accounts to use here. This one comes after the above two are completely satisfied!
  4. Future Big Purchases: I reserve this part for necessary purchases only. Examples: A replacement car, down payment for a home, new appliances, home improvements (mandatory only), and other big ticket items that you must have.
  5. Fun Stuff: This is where we can use savings to work towards things we want. In this part I include vacations, weddings, holiday and birthday gifts, collectibles, etc. Once you get out of debt and start saving it is important to include fun things too!
  6. Other Goals: These are goals that don't fit into the above categories and are of lowest priority. Examples: Charitable gifts, gifts for friends or family, Religious donations, etc. These are goals that would not affect your livelihood if not obtained. All of these goals would start with "It would be nice if..." and are completely optional.
Following this list should provide you with a good plan for the future and cover any financial emergencies that come up. Once we have an adequate emergency cushion and our normal expenses covered we can continue onto saving for retirement and other goals. Every dollar we save is another step towards our financial freedom. Let's make sure we put those dollars in the right place!