Prioritizing Your Financial Life
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Prioritizing Your Financial Life
When it comes to financial planning there are so many ways to attack it. Additionally, I find one of the hardest things for people is to prioritize their needs. Oftentimes, individuals conflate importance with immediacy, as in the sooner something is approaching the more important it must be. Although I certainly understand this mindset I don’t believe it is the appropriate way to handle one’s finances.
I’d like to take a stab at prioritizing what I believe is an appropriate order we should be looking at our finances. Naturally, it is not one size fits all and feels to override because at the end of the day I, nor anyone else, can tell you what is most important to you.
Protection–
To me, the biggest and most important thing one should focus on first is to protect oneself and family from a tragedy derailing everything. This usually means making sure you have appropriate insurance coverage. Let’s face it – if you can always work longer, and make more money as long as you are financially able. All too often I see individuals in a terrible bind because they didn’t contingency plan with proper insurance. Life, disability, long-term care, property and casualty, even health care. This is the basics of a good foundation to build off of, as without it you are building a financial plan on a house of cards.
Destructive Debt–
Next on my list is bad debt like credit cards. I want to make a clear distinction I am not referring to mortgages or even car loans. Rather, those 20% credit card debts that simply crumble a family need to be addressed heavily. One needs to have a well-thought-out plan to eliminate and equally as important assure themselves that they won’t end up back in this hard-to-recover place. The fact is I rank this so highly as without it people can be stuck in neutral for years.
Emergency Savings–
Simply put have 3-6 months of expenses saved somewhere liquid and accessible. I less care about where it is saved and more so that you have a place to get funds if/when you need them. Many times people end up with that destructive debt simply due to the fact that one unexpected expense broke their finances. Having a nest egg or slush fund to insulate you from this is highly important.
Retirement Savings–
Finally something fun to talk about, right? There is an epidemic in our country and that is that most people don’t have enough money saving, or aren’t saving enough, to live a dignified retirement. You cannot borrow for retirement remember and at some point, you might be forced to retire. The last thing you want, or anyone I’ve ever worked with, is to be staring down a 30-year retirement and not be able to live the dignified life you’ve become accustomed to. Additionally, the sooner you start the more effort you put towards this area will work wonders for your optionality and ability to live the retirement of your dreams.
Other Savings Goals-
Now that emergency and retirement are on target you can focus on whatever your next savings priorities may be. Whether that be college for your children, a secondary home, or a big project. These items aren’t critical to one’s financial plan and/or there are generally other means to achieve these goals, such as borrowing for college. I am not suggesting these aren’t important to you, as heck they may seem more important than a far-off retirement may seem, however, everyone will and needs to retire, yet everyone doesn’t need a secondary home.
Constructive Debt–
It is probably a tie for me on the next, and last, two categories. I’ll give a slight edge to paying off constructive debt like a mortgage or car loan. Most people I know have low interest rates and affordable homes. You get tax deductions for a mortgage and get to delay paying up front as the banks/government have given us tons of way to afford housing. I see very little benefit to paying off a home aggressively, except for the peace of mind factor. It can also serve as a mental catalyst to getting you prepared for the next stage of your life.
Charity–
Seems messed up to have charitable given as the least important piece of your financial plan. Certainly, a great argument can be made that it is the most important, and I even have tons of clients that tithe thus prioritizing it almost anything else. Funny enough I get it and can’t even tell those people they are doing anything wrong (if anything I highly admire those people). That said if I am callously looking out for my client’s finances first and foremost if the other things above aren’t in a good spot giving money away seems, well conflicting at best.
Let the debates begin, but I’m sticking to my story that this is what I feel works best for most people. Exceptions to every rule and I take no issue if people shuffle this deck to their own circumstances. One man’s opinion on what I’ve seen works best in my 20-plus career.
Hope you enjoyed it and stay wealthy, healthy, and happy.