Determining Your Financial Priorities

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.

  1. 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.
  2. Finish building emergency fund to one month of expenses. (if not already achieved via our 75/25 method)
  3. Repay 2nd mortgage. This is not our next smallest debt, but rather the one with the next highest interest rate.
  4. Repay my student loans. Again, this loan carries our 3rd highest interest rate.
  5. 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.
  6. Finish building emergency fund to six months expenses. (if not already reached via our 75/25 method)
  7. 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.)
  8. 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.
  9. 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?

14 Responses to “Determining Your Financial Priorities”

  1. Anonymous

    I have no debt except a very management mortgage at 5% interest and also a fat savings (several hundred thousand dollars). My kids are still relatively young but their college is funded. MY focus is on retirement. Although it is 20 years away and I have funded them for 20 years, my IRA accounts have performed poorly the last 10 years so I am plowing money into them. So my only real goals are:

    1. Pay off house
    2. continue to max IRA ((traditional and Roth)
    3. Seek more opportunities to contribute to the community (I do a good bit at church now).

  2. Anonymous

    Matt, it’s great that you identified that each person will have a different set of requirements and different goals to work towards. Here are some of mine.

    1. Build an emergency fund of 6 months (we’re currently at about 2)
    2. Work on earning some money on the side.
    3. Pay down my student loans (almost 60k)
    4. Work towards building a significant nest egg for a down payment

    Best of luck to both of us as we work towards our goals.

  3. Anonymous

    The “now what stage” is interesting. Part of the reason why I enjoy debt is bc it is so motivating to get me to focus on improving my finances.

    Without debt, I lose some motivation to save and make moeny ironically.

  4. Anonymous

    1. Pay off car loan.
    2. Pay off student debt.
    3. Build emergency fund to 6 months worth of expenses.
    4. Start funneling into retirement funds.

    I also set intermediate fun savings goals for trips and musical gear, etc.

  5. Anonymous

    Moneymonk, now you invest money you can afford to lose in higher-yield stuff!

    We don’t have any debts but our mortgage, and we’re comfortable with the overpayment we make on that so it’s not going to change. There is a chance he won’t get into the school we want, and we’ll have to put this all off an extra year.

    Our plan is dependent on my son starting public school in September and everything else staying the same financially:

    1) increase 401k contributions – my partner cut his back to 10% when our son was born 4 years ago and he’s looking forward to bumping it back to 20% this year when our daycare cost disappears.

    2) more investment – we dabbled in single-stock picks this year with some bonus money, and I see that expanding every year

    3) New house – our house is too big and too old. We need to finish up some home-improvement projects so we can get it on the market when the market picks up, and then either buy a newer, smaller house or (my dream) build one on an empty lot in the neighborhood.

    4) less money conflict. We’re still experimenting with different ways to handle cash flow, bank accounts, and investments so we don’t have to struggle so much with each other. We have an agreement to put the emergency fund in a separate account from the “saving to spend on home improvements and other large items” account once we aren’t paying daycare anymore, in hopes it will make these discussions easier.

  6. Anonymous

    I’m at the “now what” stage. We have paid the car off, have a fat savings account. We do not plan to pay off the house, because we want to move soon. Not sure that the house will sell for the amount we paid. 401k is funded.

    We give and we travel

  7. Anonymous

    1) Payoff credit card. Hope to do that next month with a bonus.
    2) Save for a new house. Hoping to expand the family next year and need a larger place.
    3) Continue to increase retirement contributions.
    4) Build up emergency fund. We’re working on it now, but I want it bigger.
    5) Fund children’s education. This won’t happen till my wife returns to the work force.

    Charity for us now is done by volunteering our time. We’re going to start incorporating adding an item or 2 per week to our grocery shopping to donate to a local food pantry. Hopefully overtime we’ll be able to donate cash as well.

  8. Anonymous

    @ Storch – There’s no such thing as too much for a traditional IRA. You may make too much to for your contributions to be DEDUCTIBLE but you can still make them. That said, if you want more retirement savings, consider funding a traditional IRA then immediately converting to a Roth.

  9. Anonymous

    Between my contributions and employer match, 11% goes straight to my 401k. With our profit sharing plan, another 4% (or so) goes in on top of that. TBH, I’m not in any hurry to contribute any more than that.

  10. Anonymous

    This is a question I’ve been debating with myself lately. I’m already maxing my 401k and have too much income for a traditional or Roth IRA, so I think my annual retirement contributions are done. My emergency fund is set and I have no consumer or car debt. My priorities are therefore:

    1) Eliminate second mortgage debt.

    2) Pay off student loans — this is a big topic of debate in the personal finance world. My interest rate is very low (just under 3%) but I make too much for any student loan interest tax deduction. At least FOR ME it feels right to pay it off as my next priority. This plan drives some people crazy who insist that it’s smarter to stretch that low-interest money out as long as possible. I have waffled on this plan many times.

    3) Make taxable investments. (This part is somewhat daunting for me and my investing track record to date is poor.)

  11. Anonymous

    Maxing out two 401ks and two IRAs takes a ton of cash ($43k) — great job if you can get there!

    As for me, one my goals is to try to increase my 401k contributions 1 percentage points a year — but my first priorities are to be debt free and fund my first child’s college. It’s a great idea to make a list and stick with it!

  12. Anonymous

    With having no debt my priorities are first to expenses, then to retirement. Being young I want to get money into my Roth IRA now cause I may have different priorities in the future.

  13. Anonymous

    I like that you list giving first. That is also the first line on our “budget.”

    OK, so other than the regular monthly expenses that a family of 5 incurs (utilities, groceries, gas, school supplies, clothing, etc, etc), here’s our list:

    #1 – Give to church/charity – it really is the first line on our budget, even before the required monthly bills! And even when hit with a surprise $600 car repair bill, we did not reduce (or even delay) the amount we gave to church/charity.

    #2 – Retirement savings – max ’em out!

    #3 – Prepay on mortgage – this is our only debt and our goal is to have this completely paid off before our first daughter goes to college. Then we can help out with college, if needed (on top of what we have already saved and are saving for them).

    #4 – the EF is already at 9-12 months of expenses. Whether it’s 9 or 12 mos depends on whether we count stuff like retirement contributions and the extra principal payment on mortgage in our “expense” calculation, and we actually argue as to the appropriate amount that should be in there (I think it should be more, he thinks it’s already more than enough! So we’ve compromised at it’s current level). If it should fall below it’s current level, we would make it a priority to replenish it.

    #5 – Vacations/family fun. This is not less important than the previous items, and we already budget a certain amount for this each month/year. But the more we have left over after the bills and the previous 4 items, the more of #5 we can do – like more eating out, movies, or even the last minute trip to Disney we took last year. And that’s important while the kids are still young! (as Suze Orman says “people first!”)

    #6 – home repairs/maintenance/remodels. We have a list of repairs/maintenance on our 30 year old home a mile long. Last month we installed new gutters. This month, we get to cross off new windows from the list (And they came in $1000 under budget – yay!). Still on the list: kitchen remodel (but we already bought the new fridge last month), master bath remodel, and various other minor projects (can someone please help me paint? I’m so sick of painting! It was fun at first, but I’m over it now and there is still one kid’s room to go!).

    yeah – that’s the big picture anyway..for now 😉 We don’t make much, but with God’s help we make it work 🙂

  14. Anonymous

    This is a great exercise to go through, especially with your spouse. Our priorities are:

    1. Fund 401k account – Currently contributing 7%, want to bump this up to 10% this year.
    2. Build Emergency Fund – Currently @ 3.7 months, targeting 8-12 months
    3. Pay off installment loan – This is our only debt. We’re currently paying extra, but after we build our Emergency Fund to 8 months I think we’re going to throw everything at this debt to pay it off in a couple years.
    4. Save for college – Our son is due in May and we plan to start saving via a 529 right away. We won’t be able to put much in early on, but we want to make it automatic right away and also give the grandparents the option to contribute as well.
    5. Save for a house – We’d like to purchase a house in the next five years so after we pay off the loan we will direct all of those funds to a house fund.

Leave a Reply