How to Set Financial Priorities

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:

DEBT

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

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.

RETIREMENT SAVINGS

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.

COLLEGE SAVINGS

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.

BUYING INSURANCE

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

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).

7 thoughts on “How to Set Financial Priorities”

  1. Thanks for sharing. IMHO, I feel that Insurance and Estate Planning could move a bit higher up on the list .. closer to Retirement Savings. I’ve seen too many situations where people are unprepared and the “unplanned” accident occurs.

  2. I think insurance, especially if you have any dependents or assets (and an apartment full of junk definitely qualifies) should be #2 after debt, and of course should be more imminently considered than college or retirement savings. Your “cash savings” will go out the window like that if your home catches fire or you run over an old lady in the parking lot, and your family might end up on the streets if you forget about life insurance.

  3. The importance of estate planning depends on your circumstances. If you have no dependents then it is probably has the lowest priority of any of the things on that list. I’m not saying that it isn’t necessary, but if you have no dependents to look after whoever gets the money(including the state) is getting a windfall.

    Insurance, however, is pretty important, and probably should be higher up the list. Maybe after cash savings?

  4. I agree with these but I would put at the very top of the list contributing to a 401k to the level of employer match. Getting an instant 25% or 50% return is substantially more than any other investment, including the paying off of debt.

  5. Young,

    How do you suppose people are going to meet their goals like retirement and college savings? Investing is the fuel for all future financial goals.

    Finally, lots of people don’t want alternative income. So, although alternative income may be one of your goals, it may not be the goal for everyone else.

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