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When my husband and I were first married, we had big plans for our budget. We wanted to save for a house, start our retirement accounts, pay off student loans, pay off both of our cars, and still have some money left over to live (just thinking about trying to do that gives me heart palpitations now).

One of the first things we did was create a budget. Budgets are more than just ways to track your spending. They’re also a great way to help you reach your goals. (Here’s how you can create a budget of your own.)

If you have big plans for your budget, like paying off debt or saving for retirement, you’ll need to create a plan. You’ll want to know exactly what types of accounts will help you reach your goals, how much money you’ll need to achieve your goals, and how you should prioritize between those accounts.

How to Reach Your Financial Goals

What types of accounts do you need?

Depending on your financial goals, you’ll need different types of accounts. For a quick overview of the different types of accounts to you’ll need to get started, read about the types of accounts to include in your financial toolkit (Part 1 and Part 2).

If you’re trying to pay off debt, start by listing all your debt accounts (each student loan, car loan, credit card, etc.). Include the current payoff amount, interest rate, and minimum monthly payment.

If your goal is to save money, start by listing the areas that you want to save. Do you want to create a vacation fund, save for your first home, remodel your kitchen using a household fund, start your retirement savings, save for your child’s college, or all of the above? Next to each goal, write the amount of money that it will take to fund your goal and when you’d like to reach your goal. Unsure about the amount? Read on!

How do you know how much you need in each account?

For debt accounts, like your credit cards and loans, you’ll need to pay the entire balance, plus interest. To figure out exactly how much you’ll need to pay each month to reach your payoff goal,

Calculating the amount that you need to save is a little trickier, especially if you are saving for a long-term event, like retirement or your child’s college savings. The amount of interest you earn will play a large role in the amount that you need to save each month. Some calculators allow you to adjust the interest rate that you think you’ll earn,  but if it’s not guaranteed, try to estimate conservatively. For example, if you think you’ll earn 10% on your investment, try calculating the amount of money that you’ll have using an 8% interest rate to account for market fluctuations.

For long term goals, refer to websites dedicated to helping you reach your goal. For example, I listed a few retirement calculators in this retirement savings post. I also talked about the different types of college savings plans (and how to start saving) in this post. These calculators will help you estimate the amount that you’ll need, as well as how much you should save to reach your goal.

For short term goals, like starting a vacation fund or a household fund, start by estimating how much you’ll need. The interest you earn will most likely be minimal, so you won’t need to worry about calculating that in your goal. For example, you may want to spend $600 on a vacation next year. To do that, you’ll need to save an extra $50 a month for the next year. For a $1,000 rainy day fund, you’ll want to save $100 a month for the next ten months. At the end of the year, you can look at your interest as an extra bonus.

How do you prioritize between the accounts?

To pay off debt:

Some financial advisors recommend using a snowball strategy to fund your goals, like paying off your smallest credit card first, and then using that money to pay off the next credit card, and so on. Depending on your personality, you may find that the snowball method is perfect, or you may want to try something else.

  • If you are the type of person that likes to see immediate results, use the snowball method. Organize your list of debt by the payoff amount. You’ll need to make the minimum payment on all of the loans, but apply any extra money to the smallest one. Once that loan is paid off, use the entire amount that you were paying on that loan to start paying off the next smallest loan. As you pay off each loan, you’ll start to make progress and be able to pay off the next loans faster.
  • If you’re more of a practical, stick-with-it type of person, organize your list of debt by the interest rate. While you won’t see immediate results, you’ll save yourself interest (and money) in the end by paying off the higher interest rate loans first. Continue to make the minimum monthly payments on all loans except the loan with the highest interest rate. Once you’ve put all extra money toward your highest interest rate loan and paid it off, move on to putting all extra money on the next highest rate loan. This is the method that my husband and I used to pay off his student loans in three years.

To fund your savings:

Even if your main goal is to pay off debt, it’s a good idea to have a small rainy day fund. Many financial advisors recommend starting a savings account with $1,000 before paying off any debt.

Although some financial advisors recommend saving $1,000, it seems extremely low. Especially considering that many things, like medical procedures (even if you have insurance), cost much more than $1,000, you may feel more comfortable saving more. Once you reach your target balance in your rainy day fund, stop saving until you have paid off all debt (excluding “good debt” like a mortgage). If you already have a rainy day fund, great. If not, start one before anything else and fund it to a level that makes you comfortable ($10,000 was my goal when I started my family).

After you have your rainy day fund established, it’s time to prioritize the rest of your accounts. Start by saving for your retirement (use a retirement calculator, like the one in my Start Saving for Your Retirement Dreams post, to make sure that you’re saving enough to live on when you retire). Then focus on adding to your other savings accounts (like your child’s college fund, your vacation fund, etc.).

When it comes to saving, there’s no rule on how to prioritize your accounts. After you’ve established your rainy day fund and started your retirement fund, base your savings goals on your life goals. Do you want to take a vacation this year? Start saving there first. Plan to buy a house in five years? Start saving everything you can for that.

Planning (and reaching) your financial goals is a huge part of budgeting. Once you know what types of accounts you’ll need, how much you’ll need in each account, and how to prioritize your accounts, you’ll be well on your way to reaching your goals!