How to set and prioritize short & long term financial goals

Text size: aA aA aA
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, paying down debt, 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.
When you're deciding how to allocate money, it's important to understand the bigger picture so that tunnel vision towards one goal doesn't get in the way of making continual progress towards others.
— Chris Vale, Senior Digital Director,
Digital Advice and Investment Solutions, Merrill Lynch Wealth Management

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 towards each of these four 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 meet employer match; Two: Maximize 401(k) contributions; Three: Contribute to an IRA; Four: Make catch-up contributions; Five: Consider a Health Savings Account (HSA). 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.

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

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.