If my time as a personal finance blogger has taught me but one thing, it would be that personal finances are like snowflakes… Seemingly similar, yet utterly unique. While there are a few fundamentals that should be used to create a solid financial foundation, there is seldom a blanket solution for everyone all the time.
A healthy challenge for each of us
In response to my recent article on when you should start investing, FCN reader John laid out his financial “order of priority.” John’s rundown moved me to prioritize my own specific plan, publish it here on FCN, and challenge you to do the same.
We all have unique circumstances, but because financial fundamentals remain consistent, we’ll likely see a lot of similarities sprinkled amongst the difference between our individual plans.
In writing this article, I have two specific goals. First, I want to challenge everyone reading it to prioritize their financial plan. Second, I want to highlight the fact that unique circumstances sometimes call for deviations from well accepted “best practices” such as Dave Ramsey’s baby steps.
My financial order of priority
Before giving you my ordered list, I should briefly touch on our giving strategy, and also outline our 75/25 method of debt reduction and savings contributions we adhere to throughout most every step.
- We always give away at least 10% of our pretax income.
- 75% of our discretionary income (i.e., after living expenses, etc.) is applied to high interest debt reduction (post tax.)
- 25% of discretionary income gets evenly distributed among our liquid and retirement savings accounts (post tax.)
Once we have given, paid the bills, and divvied up our cash into our budgetary envelopes, all remaining money goes toward savings, debt, or interest on debt. Below is our current road map of financial priority.
- High interest debt repaid. For us this means around $4, 200 in a Lending Club debt consolidation loan that was used to pay off credit card and auto loan debt.
- Finish building emergency fund to one month of expenses. (if not already achieved via our 75/25 method)
- Repay 2nd mortgage. This is not our next smallest debt, but rather the one with the next highest interest rate.
- Repay my student loans. Again, this loan carries our 3rd highest interest rate.
- Repay my wife’s student loans. Here I deviate from the highest interest plan adhered to earlier and opt to pay this lower rate loan off prior to repaying our 1st mortgage.
- Finish building emergency fund to six months expenses. (if not already reached via our 75/25 method)
- Max out tax sheltered retirement savings. This includes a 401(k) and 403(b) (mine and my wife’s, respectively), both of our IRA accounts, and possibly other tax sheltered accounts we may have in the future (like a SEP-IRA.)
- Repay first mortgage. If all goes according to plan, this will be our last debt and will work to pay it off early using all discretionary money remaining after step 7.
- Savings for children. At this point, we have no children (yet), and see our freedom from debt as being more beneficial than worrying about contributing to their education. As time goes by, however, we will start saving thinking about branching out into things like a 529 college savings plan.
What about you?
Now that you know our plan, please share yours. While certain details of your approach might clash with ours, that’s okay. It’s not imperative we agree on every little detail and, in fact, what’s right for me might not be right for you. The important thing is for each of us to have a written plan in place that is tailored to our specific needs.
So… What is your financial order of priority?