How to set and prioritize short- and long-term financial goals

When you're deciding how to allocate money, it's important to understand the bigger picture so that tunnel vision toward one goal doesn't get in the way of making continual progress toward others. Here's what to consider when creating a financial strategy.

How do you invest when you have student loans to pay off? How do you save for a vacation and a down payment on a new house at the same time?

Many people divide their budgets according to the 50/30/20 rule, a common guideline for budgeting that organizes spending into 50% for necessities, 30% for wants and 20% for savings — including retirement, debt repayment beyond the minimum and unexpected expenses. While budgeting for expenses (PDF) is an important first step, the next challenge for most people is how to handle multiple financial goals that compete for that last 20%. Fortunately, there is a framework to help you prioritize these goals and effectively make progress.

Four types of financial goals

Most financial goals fall in to one of four main categories: plan for retirement, pay down debt, prepare for the unexpected and other goals. These goals should be pursued at the same time, and the visual guide below provides a general framework for how you might prioritize multiple goals. You may find that some goals don't apply to your specific situation, so consider what's right for you — these are not hard-and-fast rules. In the dropdowns below you can find more details about the prioritization within each category.

Your money: Allocating the 20%

Put some of your savings toward each of these categories and consider the suggested top-to-bottom order of priority. Category one. Plan for retirement. Order of priority. One: Make 401(k) contributions to receive full employer match; Two: Maximize 401(k) contributions; Three: Contribute to an IRA; Four: Make catch-up contributions; Five: Consider a health savings account. Category two. Pay down debt. Order of priority. One: High-interest credit card debt; Two: Car loan; Three: Student loan; Four: Home equity loan; Five: Home mortgage. Category three. Prepare for the unexpected. Order of priority. One: Emergency fund/life insurance; Two: Additional auto/home insurance; Three: Long-term care insurance. Category four. Other goals. Your personal savings goals, like a down payment on a home or your next vacation.

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Plan for retirement

Dollars you put toward retirement may be able to be saved in several types of accounts, each with its own advantages, contribution limits and other restrictions. And no matter which accounts you use, the earlier you start saving for retirement, the more you can benefit from compounding returns and tax advantages.

Contribute to a 401(k) plan to maximize employer match

Contribution matching from an employer 401(k) offers an immediate return on the dollars you save in the plan, making this one of the most advantageous retirement savings steps of all. Try contributing at least as much as the percentage your employer will match, so you don't leave "free money" on the table.

Maximize your 401(k) plan

Working your way up to contributing the maximum amount allowed for your 401(k) popup to your 401(k) can reduce your tax obligations and help you reach your retirement savings goals faster.

Open a traditional IRA or Roth IRA

If you've maximized your 401(k) contributions or don't have access to a 401(k), consider saving for retirement in an IRA. An IRA can offer tax-free growth and other tax advantages and allow you to access a wide range of investment choices. Use our Retirement Account Selector tool to see what kind of account is right for you.

Make catch-up contributions

Workers aged 50 and older can save more for retirement in a 401(k) plan or IRA by making catch-up contributions.

Open a health savings account (HSA)

If you have a high-deductible health plan, you can use an HSA to save and pay for these qualified medical expenses tax-free.

Pay down debt

While most debts will require a minimum monthly payment, paying more than the minimum will help eliminate debt more quickly and save money on interest payments in the long run. It's generally recommended to focus on paying down highest-interest debt first and to leave extra payments toward certain debt with lower interest rates or tax advantages — such as student loans or mortgages — as a later priority.

Prepare for the unexpected

An emergency fund is crucial for financial independence and being prepared for unexpected costs. Depending on your financial commitments, you can aim to save enough to cover six to nine months of expenses.

If you have dependents, a life insurance policy can help minimize the financial fallout, should something happen to you, by helping to replace lost income and cover debts and other expenses.

If you own a home or car and have only basic insurance, consider increasing your coverage. You may also consider purchasing long-term care insurance to offset the costs of long-term care as you age. These steps can give you the peace of mind of further protecting your assets and savings.

Other goals

Alongside the above goals, you may have priorities based on your own preferences and life situation, whether that's furthering your education (or your child's) or saving for a home or your next vacation. Your time horizon for when you will need to access the money is a key factor in determining whether to use a savings vehicle like a high-yield savings account or certificate of deposit (CD) or to invest those dollars in a brokerage account or a 529 plan.

Your financial strategy should evolve over time as you review your goals and your circumstances change. While this can be a helpful framework for approaching multiple financial goals, your own situation may not call for following these priorities exactly. Consider consulting a tax professional or a financial advisor to get expert advice specific to your needs.

Next steps

If you need help with your financial strategy, connect with a Merrill advisor to discuss your goals and how to put a plan into action
Learn about Merrill Guided Investing for help in managing your financial and investing goals
Use the Bank of America Spending and Budgeting tool to see where your money goes each month

Please review the applicable Merrill Guided Investing Program Brochure (PDF) or Merrill Guided Investing with Advisor Program Brochure (PDF) for information including the program fee, rebalancing, and the details of the investment advisory program. Your recommended investment strategy will be based solely on the information you provide to us for this specific investment goal and is separate from any other advisory program offered with us. If there are multiple owners on this account, the information you provide should reflect the views and circumstances of all owners on the account. If you are the fiduciary of this account for the benefit of the account owner or account holder (e.g., trustee for a trust or custodian for an UTMA), please keep in mind that these assets will be invested for the benefit of the account owner or account holder. Merrill Guided Investing is offered with and without an advisor. Merrill, Merrill Lynch, and/or Merrill Edge investment advisory programs are offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and Managed Account Advisors LLC ("MAA") an affiliate of MLPF&S. MLPF&S and MAA are registered investment advisers. Investment adviser registration does not imply a certain level of skill or training.

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