Sometimes it’s hard to know where to begin. Whether you are right our of college or nearing retirement it is difficult to figure out which are the most important financial priorities to focus on. There are a myriad options available that may or may not solve the issue they want to address, the key is finding someone who will give you good advice, not try to sell you a product. A good financial planner can be both someone who gives advice, but also someone who really listens to their client to help them figure out their own path. At Blueprint we really put an emphasis on the listening part, we want to really know our clients wants, needs and concerns so can we begin to put together a plan specifically designed for them. Here are some things to help you get started:
1. This is NOT one size fits all
It’s difficult to come up with a generic list of financial goals, because everybody’s financial situation is different. A college graduate with $200,000 in school loans, but no other debt, will have different financial priorities than somebody in their 50s with little saved for retirement and $25,000 in credit card debt. Given the fact that variations in financial situations from one person to another are so great, there’s no such thing as one size fits all.
This is my biggest concern when it comes to financial gurus who are dogmatic about their approach to personal finance (see: Dave Ramsey, David Bach, Suze Orman, etc.). They leave no room for different financial situations, different personalities, and different life goals. This reminds me of Maslow’s hammer which states “If all you have is a hammer, everything looks like a nail”. At Blueprint we have an entire toolkit we can open up to build your financial plan.
2. Think in terms of goals
You can’t just think in terms of steps. Instead, focus on your financial goals. Having $1 million in the bank is not a goal — it’s a number. What are you going to do the day you become a millionaire? Probably the same thing you did the day before. That’s what most people who become millionaires do.
As an example, one goal is to be financially able to handle an emergency. This goal often translates into saving three to six months worth of expenses in a savings account. While that’s one way to meet this goal, it’s not the only way. We like to talk about flexibility, in this case maybe we use a home equity line of credit or a 0% interest credit card short term, it all depends on your particular situation.
The key is to separate the goals from how you’ll achieve the goals. Doing so enables you to think outside the box for creative solutions.
3. Multi-tasking is the Key
Throw out the idea of working on just one goal at a time. There’s no set of required sequential steps. You should be pursuing multiple goals at the same time. For example, one can — and should — build an emergency fund at the same time they’re saving for retirement. The notion that you should pursue financial goals one at a time, a concept usually marketed by popular financial personalities as “steps,” often leads to sub-optimal results.
4. Track Your Net Worth
If you see your net worth — what you own, less what you owe — you’ll see your progress. Net worth is more important than income in determining your financial resilience. It’s your financial “scorecard”.
You can make decisions about how certain actions and strategies will affect your net worth. For example, we can evaluate whether to pay off a debt quickly or invest the extra cash in light of how the two options will affect our net worth. But first you have to know what your net worth is, and be able to track it. At Blueprint all our clients have their own personal “financial hub”, it is a one page screen which shows all your assets & liabilities in one place, updated daily, available on your computer, phone or tablet.
5. Liquidity is important
Liquidity is your ability to access cash quickly. It’s often overlooked when it comes to getting out of debt. For example, paying off installment loans (e.g., car or student loans) reduces your liquidity. Once you pay extra on these loans, you can’t get the money back. In contrast, paying off a revolving loan (e.g., credit cards or home equity line of credit) increases your credit.
Of course the goal is to get out of debt completely. But one could use a revolving line of credit in an emergency. You can’t use a car loan to deal with an emergency. Once again it goes back to flexibility and making sure we are doing multiple things at once, paying down debt, improving access to credit, and maintaining an adequate level of liquidity. Once you know your “why” the “how” becomes much easier.
6. Money you don’t spend can have a significant impact on your life
You don’t need to spend money to get the benefits of having money. The money you save can have a profound effect on your life. Let me explain.
Having a solid financial foundation enables us to make life choices we wouldn’t otherwise make. With money in the bank, you may be more likely to pursue your dreams, which may involve a different lower paying job, starting a business, or something else. You may not need to spend the money you’ve saved to accomplish these goals, but the money in the bank can give you the confidence to take the risk.
My List of Financial Priorities
We have our own list of financial priorities, and it may not look like Dave Ramsey’s or anyone else’s (I think that’s a good thing). And that‘s the point – you have to come up with a list of priorities that work for you, based on your own circumstances, goals, and personality.
That being said, here is a list of common financial goals:
- Emergency Fund
- Non-Mortgage Debt
- Retirement Savings
- Buying an investment property
- Child’s Education
- Buying a Home
So how should one prioritize these goals? Typically these can and often should be accomplished together, however, depending on the circumstances address #1-#3 are the highest priority, from there we’ll have a solid structure in place to address the rest of the needs. Without belaboring the point, once you know your “why” then the “how” becomes a lot easier to in terms of planning and prioritizing your financial wants/needs.
Goal #1: Short term security
This is about not living month-to-month. For me it’s having at least three month’s living expenses saved. That will enable you to survive for a few month if you lost your job. It should also cover most emergency expenses such as a car repair or medical expenses.
This is your emergency fund. It should be invested in an FDIC-insured account. That’s the traditional way to accomplish this goal, but not the only way. You could use a home equity line of credit, however, there are risks to using a HELOC. The bank could cancel the line in a bad economy, or the interest rate could rise. The point is that there is more than one way to accomplish this goal. Cash is king here.
As far as accumulating the money for your emergency fund, don’t contribute to retirement, and don’t try to pay off your debt. Put the money into your emergency savings instead. This is one area where I don’t think folks should multi-task with their goals.
That being said, expenses should be managed so that this goal is accomplished very quickly. Save 20% a month, and you’ll reach this goal is just a few months.
Goal #2: Contribute to your 401k to get the employer match
Contribute at least enough to max out the employer match (this is typically 3%). This is where I disagree with those who recommend getting out of debt before investing for retirement. Failing to take advantage of an employer match is like negotiating for a lower salary. Further, time is the secret ingredient of compound interest.
Goal #3: Tackle high interest debt
High interest debt is any loan with a rate of 10% or more. Your definition might be different. The point is that high interest debt needs to be dealt with as quickly as possible.
There’s more than one way to address high interest debt. Obviously, paying it off is one way. You can also refinance the debt to a lower rate. Car and student loans can be refinanced, and credit card debt can be transferred to 0% cards. This is a perfect example of distinguishing the goal (getting rid of high interest debt) with the tactics (paying it off vs. refinancing).
Another approach is to sell something. With secured debts, for example, you should seriously consider selling the stuff that you bought with the debt. This certainly comes to mind with car loans. If you are struggling to make the monthly payment, sell the car, and buy whatever you can afford to buy with cash.
Goal #4: Max Out 401k/Fund IRA
The tax advantages on tax-sheltered retirement plans are too rich to pass up. Once concerns for liquidity have been satisfied, he can begin funding an IRA. Understand too that you don’t have to max out the IRA. Also, for you high earners out there ($133,000 single/$196,000 married) consider a “backdoor” Roth IRA since you aren’t eligible for a standard Roth IRA due to your income.
Goal #5: Build a “Freedom Fund”
Financial freedom is NOT having so much money that you can choose to do nothing. It’s having enough money so that you can choose to do anything. This is the ultimate financial goal. It’s what drives my financial decisions.
I view these and other priorities through the lens of financial freedom. For example, you could pay off our home. In fact, if you were following Dave Ramsey’s Baby Steps, that’s exactly what you’d do. But retiring your mortgage won’t bring you additional financial freedom. Instead, it would zap a lot of your liquidity all to pay off a debt that, after taxes, is at less than 3% interest. While the day may come when you do pay it off early, you should be in no hurry. The same would be true with other low interest debt. As I said at the beginning of this article, it is all about prioritizing what is most important to you. Sometimes it’s as simple as wanting to either eat well or sleep well.
Goal #6: Give Back
Giving back should be a priority no matter where you are in your financial journey. You don’t have to limit this to money. You can volunteer your time, too. It’s important to realize that none of this is ours – we’re just renting it. That helps to put all financial decisions into a better perspective.