The Personal Finance Basics series continues this week, with a discussion about setting financial priorities in your life. Defining what you value is important, because every other financial decision should stem from this exercise.
If retiring comfortably is a high-priority goal, you have to calculate the capital you’ll need at retirement and make plans to save enough to get there. If traveling is most important, saving money for trips is a must.
One way of indirectly setting financially priorities is to create a budget, which we discussed last month.
But you can be more up-front with goal setting and directly define what’s most important in your life in understandable terms. As opposed to the (sometimes) indecipherable mess of numbers…
Life First, Finances Second
Money has no value on its own.
Money’s worth comes in the power to exchange it for whatever else we value in life – raising a baby, traveling to Rome, or buying a flat-screen TV. That’s why it’s useless to set financial goals without understanding your life goals first.
You can set an arbitrary goal, like “save more money.” But without an end in mind, how will you know how much you need, what you’ll do with it when you get there, and how you’ll stay motivated to keep going in the face of challenges?
You don’t have to figure out the rest of your life – no one can do that. Even with the best of intentions, part of life’s beauty is the journey of dead-ends and detours that makes us take Plan B, C, and D…
But you can get an understanding of what’s most important in your life today. Sit down and figure it out. Write your life mission. Set up a list of your life roles. Set long-term goals.
Do whatever it takes to light up your passion and have a clear vision of what you want before you…
With your life goals in mind, the first step is to determine, in general terms, how you’ll structure your financial priorities to achieve those goals.
There are a limited number of options for your money:
- Pay for services
- Buy something
- Save it
- Pay down debt
- Purchase an investment
- Give it away
Based on your priorities, you can establish appropriate percentages toward each of these options. For example, traveling across the world requires a larger contribution to the “saving” pile, with a corresponding decrease in the other categories.
Be Specific and Translate into Actions
With a basic idea of where you want your money to go, you can drill down to specifics and determine what actions you need to take in order to make things happen.
You want to travel the world while putting away for a comfortable retirement, but you have some debt to pay off (student and car loans).
You’ve determined that you’ll attack the debt first while trying to maximize retirement savings. Once paid off, you’ll save money for regular traveling.
How do you determine specifics and next actions? For debt, you’ll need to figure out the best order to pay off what you owe, and set up automatic payments from your checking account.
For your retirement goal, you’ve decided to set up regular monthly transfers into your IRA. Finally, once you begin saving for a travel goal, you’ll need to open a savings account and determine how and how often you’ll save.
All of these require some action and decision on your part, without which you’ll be spinning your wheels in the dark.
Focus on the Goal, But Be Flexible
It’s important to remind yourself of your goals regularly, and to make sure your actions are aligned with those goals.
But it’s equally important to keep your eyes open for new opportunities that may pass you by if you’re insistent on staying in your bubble.
A happy balance between motivated focus and keen awareness will lead to a happy life, filled with financial successes and accomplished goals.