Three milestones on the road to financial stability

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While many of us desire financial stability – including emergency savings, a retirement strategy and manageable debt – getting there is often the hard part. Having a map with clear milestones can help guide you to your destination. Here are three financial milestones to help you build stability and flexibility into your financial life.

Before you begin your trip, there are a few things to make the journey easier: outline your budget, review your life insurance needs,* optimize your debt, and enlist the help of a guide – a financial advisor.

Milestone 1: Building a base

While we recommend prioritizing each goal from top to bottom, you can tackle these one at time, save for them equally or put more money toward one than the others. To make it easier, automate as much as you can. Consider diverting part of your paycheck directly into an emergency savings or retirement account and setting up automatic payments for any debt.

  • Save $500 to a month’s worth of expenses in emergency savings. This can help you cover minor repairs or a few days of missed work without taking on new debt. Consider keeping your emergency savings in an account separate from your everyday spending.

  • Take advantage of any employer matches in a health savings account (HSA) and retirement plan. If your employer’s plan provides a match, this can give you an immediate return on your contributions, in addition to a tax benefit and potential market appreciation. HSAs can help you save for retirement, and they also offer tax-free withdrawals when used for qualified health care expenses.**

  • Pay down high-interest, nondeductible debt. Some types of debt, such as mortgages and some student loans, allow you to deduct the interest paid from your taxable income. However, high-interest, nondeductible debt, such as credit cards, is likely to cost you more in interest than you can expect to earn on your investments. You’re better off paying down this debt.

Milestone 2: Gaining stability

Once you’ve completed Milestone 1, you can build on that success with Milestone 2. Again, prioritize each goal in order, and automate where you can.

  • Save 1½ to 2 months’ worth of expenses in emergency savings. Not only will this help cover larger, unexpected expenses or longer periods of lost income, it can also help you weather multiple events. You may be tempted to make this your priority, but don’t focus on it at the expense of the goals outlined in Milestone 1.

  • Save 10% to 15% of your gross income (including any employer match) in retirement accounts. When it comes to retirement savings, time is your ally. If this amount is out of reach today, start with what you can and pledge a portion of any future raises toward your retirement savings. Bonuses and tax refunds can also help boost your savings.

  • Check your debt-to-income ratio. To calculate your debt-to-income (DTI) ratio, divide your monthly debt payments by your monthly gross income. If you’re paying a mortgage, try to keep your DTI ratio at 35% or less. (Without a mortgage, strive for 20% or less.) A higher DTI ratio may constrain your budget, making it difficult to purchase a home, and force you to accept higher interest rates. To lower your DTI ratio, start paying down the debt with highest after-tax interest rate.

Milestone 3: Optimal state

Just as a road trip can have a detour, life can be full of the unexpected. If an unexpected expense arises, you can spend from your HSA or emergency savings knowing it’s there for exactly that purpose. If that expense moves you back to an earlier milestone, you can go forward with confidence knowing you’ve navigated these roads before.

  • Save 3 to 6 months’ worth of expenses in emergency savings. This amount can help you withstand longer periods of unemployment or multiple larger expenses without having to dip into your retirement savings or take on new debt. It can also provide flexibility to do the things you want to do, such as taking a sabbatical, switching careers or taking time off to care for a loved one.
  • Stay on track for your retirement goal. Your vision of retirement is unique, and so is your path to get there. In this milestone, the focus is on ensuring you’re saving enough to realize your retirement goal. Your financial advisor can help you adjust as necessary.
  • Think about your attitude toward debt. If your balances continue to cause you stress, you may want to consider paying them down. The goal is to be comfortable with the amount of debt you’re carrying.

Three Milestones to Financial Stability

 

Emergency Savings

Saving for Retirement

Debt Reduction

Milestone 1: Building a base

$500 to 1 month’s worth of expenses

Employer match (HSA then retirement)

High-interest nondeductible debt

 

 

Emergency Savings

Saving for Retirement

 

Debt Reduction

Milestone 2: Gaining stability

1½ to 2 months’ worth of expenses

10% to 15% of gross income, inclusive of match

If DTI ratio is >35% with a mortgage or >20% without, pay down debt with the highest after-tax rate

 

 

Emergency Savings

Saving for Retirement

 

Debt Reduction

Milestone 3: Optimal state

3 to 6 months’ worth of expenses

The amount necessary to get you on track for your retirement goal

Any debt that causes you stress

The road ahead

Once you’ve reached this point, take a moment to enjoy how far you’ve come in your journey. Not only have you built financial stability, but you’re also achieving financial flexibility to do the things you want to do. Whichever road you choose next, your financial advisor will be there to help you at every turn.

Important information:

*Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P. and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C. California Insurance License OC24309.

**Edward Jones, its employees and financial advisors cannot provide tax advice. You should consult your qualified tax advisor regarding your situation.