Bend, Ore. (CNN/Money) -
Kelly Kearsley, 24, and Justin Johnson, 26, are what one financial planner called "poster children" for financial responsibility.
Though their wedding is almost a year away, the Bend, Ore. couple has about $10,000 in the bank, a good start on their retirement savings and no debt other than their car loans and Johnson's student loans.
Yet, since their engagement they've been debating how to best manage their money. On one hand, both of them feel pretty strongly about paying off their debt, which totals a modest $20,000. Then again, they'd also like to buy their first house -- ideally soon after their wedding.
It's often during these big-picture stages of money management that many of us are at a loss for what to do.
Balancing the need to spend in the short term, save for the long term and trim debt is a complicated and emotional task. "It isn't always about the numbers," said financial planner Barbara Steinmetz.
It isn't just a problem for newlyweds. Parents must balance their own saving needs with paying for the kids' college, for example, and older couples often have to weigh the pros and cons of paying off their mortgage or putting the money in the bank. (See "Mortgage vs. investment.")
Though there's no hard and fast rule for divvying up your precious dollars, there is a method for thinking through these not-so-basic questions.
Put a price on your goals
Too often we define our goals as terms like "financial security" or "retiring comfortably." These ideals help explain the all-important emotional considerations but say nothing about how much we'll actually need to save each month.
"It's difficult to make any financial decision when you're dealing with goals that are not quantified," said Steinmetz.
She recommends that before all else Kearsley and Johnson find out how much of a down payment they would need to buy a house and avoid paying private mortgage insurance (PMI). With starter homes in their city around $150,000, and 20 percent a safe bet for avoiding PMI, a reasonable goal might be $30,000.
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Coming up with a dollar figure is particularly important when saving for retirement where the money needed stretches into the seven figures. In fact, one of the reasons many people are saving too little for retirement, say experts, is because they've never actually calculated how much they'll need. (See "Retirement: It's going to cost you.")
In the case of saving for college, parents know that they'll need a small fortune to foot the bill, but often don't know exactly what that means to their monthly budget. It's estimated that you'll need a $287,000 to pay the full cost of a private college 18 years from now. (Click here to estimate college costs.) Take that calculation a step further, however, and you'll find that saving $300 a month in a 529 plan could give you at least 75 percent of that figure.
Keep debt in perspective
Conventional wisdom tells us that debt should be avoided. But with interest rates as low as they are, say financial advisors, there's no rush to pay off certain kinds of loans. "Debt is not a bad thing when you can use other people's money cheaper than what you're going to be making on it somewhere else," said David Rosell of AXA Advisors.
To understand the difference between "good" and "bad" debt you need to look both at the interest rate you're paying and the purpose of the debt.
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"Bad debt is debt that is used to enhance consumption," said fee-only planner Gary Schatsky. Good debt is that used for such investments as a home or a college education.
When Johnson graduated from college 4 years ago he was determined to pay off his loans as quickly as possible. By paying more than the monthly due he cut his loans from $18,000 to $6,000. Now that his interest rate is just 3.6 percent -- half his original rate -- he's not only paying no more than the amount due, he's consolidating his loans to lock in this low rate.
"It's what to do with the car loan that really baffles me," said Johnson. He and Kearsley have been paying anywhere from $400 to $500 a month extra on their car loans, which total $5,000 and $9,000 respectively with interest rates around 6.5 percent.
Clearing out debt is great, but the extra $500 a month will more than double their monthly savings, which is now $400 (not including retirement), and allow them to sock away an extra $20,000 in about two years.
Prioritize your savings
In a perfect world you'd have ample cash flow to save for both the short-term and the long-term. But since most of us have to strike a balance between the two, it's important to not lose sight of your priorities on the way to the bank.
"The first tenet is an emergency fund," said Steinmetz. "Even before you save for retirement that needs to be put in place."
While you could always tap your retirement funds if you needed to, you'll pay a penalty and taxes to do so, added Rosell. Plan to have at least three months of your income in the bank.
In the case of Kearsley and Johnson, saving for a house is next on the list of priorities. Depending on how quickly they want to be in their own place, they might consider directing their Roth IRA contributions (about $200 a month) to their house fund. Once they are homeowners, they can catch up by increasing their contributions to their tax-deferred investments and maxing out on their Roths.
That said, it's never wise to completely turn your back on retirement. At the very least, contribute enough to take full advantage of your employer's 401(k) matching program, if there is one.
"Someone is giving you free money," said Steinmetz. "Even if you're afraid of the market, there are plenty of low-risk options. Just make sure you contribute enough to at least get that match."
Of course, you'll need to revisit these priorities regularly.
For Kearsley and Johnson, saving for their first home is just the first trick in an ongoing financial juggling act. Once they reach that goal, they might just decide they need to save up to run their own business, start a family or, who knows, travel the world.
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