I have a frequent and pleasant daydream in which the Virginia lottery board calls and says: "Congratulations! You've won the highest jackpot ever! Mrs. Brokamp, would you like to take that in a lump sum or divided up over 30 years?" This is truly the stuff of fantasy, though, particularly because I don't buy lottery tickets. Much more realistic for my family is what to do in the face of too many important financial goals and too little money to fund them all.
For example, we have:
- Several children to send to college.
- A retirement to plan.
- The desire for an extra large emergency fund.
In addition, our 1994 Honda Civic and 2000 Dodge Caravan will someday go to the great junkyard in the sky, and we'll be scrambling for replacements. Somewhere along the line, we'd like to take a trip to China, when our youngest, whom we adopted from Jiangsu province, is old enough to remember it.
How does the average American family meet these kinds of goals? And which should take precedence if you can't contribute to them all? If you have similar questions and concerns, here's how you can set about prioritizing your goals:
Goal 1: Emergency fund
If you can accomplish only one of your goals, this is it. Saving at least $200 to $300 a month in a high-yield savings account would be a good first step. Your emergency fund should include enough money to pay for three to six months' worth of basic living expenses -- rent or mortgage, utilities, medical bills, groceries, and the like.
Don't let the large sum intimidate you into not saving; set a goal of having your emergency fund fully funded within three years. If your initial goal is to save $10,000, it'll take just $278 a month for 36 months to reach that milestone.
In a true emergency, you can rely on credit cards. But if you can't pay off that debt soon, you'll quickly find yourself going backward financially. Better to have the money squirreled away for a stormy day and to pretend it doesn't exist until disaster strikes.
Get creative: Make a deal with yourself that any "found" or windfall money will go to your emergency fund. Whether it's a tax refund check, cash back on a credit card, or a gift check from great-uncle Joe, deposit it immediately in your savings account. Hold a yearly yard sale, with all proceeds to go to your retirement fund.
Goal 2: Retirement
Second (or even better, concurrently), fund your retirement, especially if your employer matches your contributions. That's free money -- plus tax breaks -- that you shouldn't pass up. If you don't save for retirement, you won't be able to retire.
Get creative: Once you pay off a debt -- for example, the $185 a month you pay on your college loans -- continue taking out that $185, but now designate it for retirement. That's a painless way to bulk up your savings.
Goal 3: College
It may feel disloyal to many of you to put your children's higher-education funds close to the bottom of the list. After all, we're used to putting our kids' needs first in almost every other way. However, think about it this way: An emergency requires that you access money because you so desperately need it. Taking money out of a college account such as a 529 savings plan means that the earnings are taxed as ordinary income, plus you'll be slapped with a 10% penalty.
If you don't save for your kids' education, they aren't out of luck; there are scholarships and loans available. No such resources are at hand if you didn't save for your retirement; you can't borrow your way into a retirement income, and there aren't Golden Years scholarships.
Get creative: If you'll be using a credit card anyway, why not sign up for a Upromise credit card, which lets you save for your child's college education while you spend? When you use these cards at participating merchants, you'll get a small rebate deposited into a 529 savings account for your child. Grandparents can sign up, too, and link their cards to your child's account.
Goal 4: Vacation
As a mental-health therapist, I'm pained by putting this goal at the very bottom of the list. After all, a well-balanced life includes relaxation and fun, especially in today's fast-paced world. Time away can help you put things into perspective and help your cares melt away. But the hard truth is that a vacation is a luxury that someone without an emergency fund can't really afford to take. That doesn't mean you shouldn't go for a cheaper version of R&R, however.
Get creative: Cut one of your household perks: Switch to a lower tier of cable or cancel altogether, cut your lawn yourself, reduce your cell phone charges, or go out to eat less. A savings of just $5 a day adds up to a nifty $1,825 in one year.
In an ideal world, all of us would have enough money for all of the things we want to do. But if your real world involves making tough choices, start with establishing an emergency fund and follow this road map all the way to financial security.
For extra credit, join our one-month Fiscal Fitness '09 challenge where we're doling out daily money-saving tips that will put an extra $2,000 in your pocket.
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