Unless you are Bill Gates, you probably have more financial goals than you do the money to meet those goals. This situation will require you to prioritize your goals and then work on those that are most important first. The question is: how do you do that? How do you prioritize your financial goals?
Here’s a list (in order of priority) that I found in today’s Wall Street Journal along with my thoughts on each one:
The article has paying off high-interest, non-deductible debt as the highest priority. Although I agree that it is a VERY high priority, I think it should go hand-in-hand with setting up a savings account or emergency fund. Why? Because unexpected expenses are always going to occur. If you don’t have savings available to meet those unexpected expenses, you’ll have no other option but to put them on a credit card. I know from experience that this can be demoralizing. This brings us to number two.
Cash savings is the key to managing your personal finances properly. Cash savings will allow you to have money available for unexpected expenses and deductibles. And, with a big enough savings account, you can raise your deductibles on your car insurance and homeowner’s insurance, which will save you money on your premiums.
No matter what your age, planning for retirement is probably one of your top priorities. I know it is mine! The younger you are, the bigger a priority retirement savings should be. Why? Because younger people have TIME on their side. I have talked about this topic numberous times. But, it all boils down to the fact that the more time you have, less the less you have to save as long as you get a decent return on your money. See for yourself by using my Cost of Waiting Calculator, which will let you compare two different retirement planning scenarios. It is truly amazing just how valuable time is when it comes to planning for goals.
If you have kids, chances are good that saving for college is a major priority. However, I agree with the author of the article in that saving for college should ONLY come AFTER you are saving enough for retirement. As the article states, you can fund college a number of different ways (even borrowing if necessary), but you can’t finance your retirement by borrowing.
PREPAYING YOUR MORTGAGE
Personally, this is low on my list of priorities. I think a person should prepay their mortgage if they have a high interest rate or are approaching retirement and don’t want to have debt during retirement.
Insurance is an important part of any financial plan. Not only should you make sure that you have adequate life insurance, you also need to make sure that your homeowner’s insurance has kept up with rising home values.
Estate planning is important no matter how big your estate. The most important part for most people is a will. A will is important because it makes sure that things are carried out the way you want them to be should something happen to you. This is an important topic that I hope to touch on in the future. And, as the article states, planning ahead will save both time and money for your heirs. Finally, be sure your beneficiary designations and titleing on your bank, brokerage and retirement accounts are up to date.
Setting priorities is important. This list can pretty much be done in order (even though I would probably switch one and two or at least work on both simultaneously).