David and Karen are a typical busy family. David works for a mid-sized firm in the marketing department and earns a good income. Karen is the primary caregiver for their three kids and does some part-time work on the side.
They haul the kids to soccer and dance classes. Both volunteer with their favorite charities. They spend time at the gym and keep up with the yard on the weekends.
And the kids love peanut butter and jelly sandwiches. Lots of peanut butter and jelly sandwiches!
Once a month, when David and Karen sit down to pay bills, the tension in the air is unmistakable.
On paper, they make enough to pay all their bills — yet they still feel broke. And when a big unexpected expense shows up, they scramble to put cash together or just put it on the credit card.
When their oldest child was born, they began a college savings account with a small balance. They never seemed to have time to open accounts for the other kids and they wonder if they even have enough money to make contributions.
One area they feel good about is their insurance. David has life insurance coverage through work and Karen has a small whole life policy that she pays every month. They don’t know much about the coverage, though.
Retirement seems so far away that any thought of saving gets set aside in favor of more pressing financial needs. Between 401(k)s, IRAs, ETFs, and the alphabet soup of other financial acronyms, they don’t even know where to start.
With all these competing priorities, David and Karen are completely overwhelmed.
Maybe that feeling is familiar.
Whether it’s investing for your kids’ college expenses, building savings to fund a major home renovation, or stashing away enough for a comfortable retirement — chances are, you’ve got a few financial goals weighing heavily on your mind.
I know because David and Karen aren’t the exception when it comes to the types of clients we serve — they are the rule.
Managing competing financial priorities isn’t miraculously resolved after one meeting with our team. We’ve been serving families since 2010, and found that change doesn’t happen overnight. You must first organize your accounts and set your goals.
Step back to see the big picture of your finances
Before you can begin to prioritize your financial goals, you need to first get organized by laying everything out on the table. This process of taking inventory will help you develop a clear understanding of your overall financial picture and put you on the path toward determining what is most important.
Start by asking yourself these important questions:
- Do you tell your money what to do or is it telling you? Put a different way: Do the largest items in your budget reflect what you value most in your life?
- How much do you currently have saved for retirement? Is it enough?
- How much and what type of debt do you have (credit card, student loan, etc.)?
- If you were faced with an unexpected emergency, would you be financially prepared to handle it?
- How much do you save per month outside of your retirement accounts?
- Where would you like to be financially a year from now? What about five years from now?
Reviewing your finances in this way should lead to a deeper understanding of the gap between your current financial state and where you aspire to be.
This was the case for David and Karen.
Any holes that could have potentially derailed their plans were addressed. They began to brainstorm on how to pay for college while simultaneously saving for retirement. An insurance review discovered that they needed a different type of coverage. They learned more about investing and began saving more. They gained clarity on their finances without all the confusing jargon.
David and Karen’s bill paying battles turned into a monthly strategy session, as now they were working together as a team.
But this would not have been possible had they not taken a holistic look at their finances and assessed what mattered most.
Assess what matters
Perhaps you’ve considered replacing the 15-year old family SUV with a newer model. It’s costing you more in repairs than it is worth — but you’d also like to take the family on a nice vacation next summer. Once you have a better understanding of your finances, you can distinguish between what is essential and what could be delayed without major consequence.
For example, you don’t want to compromise on things like:
Saving for retirement – Many people delay saving for retirement because they assume that time is on their side, believing that they can always save more when they’re older or simply retire later. What they fail to realize, however, is that due to illness or an unexpected layoff, you may be forced to retire sooner than expected. Not to mention, the earlier you start setting aside funds for retirement, the more you have to gain, thanks to compounding interest.
Establishing an emergency fund – We rarely know when a medical need, car accident, job loss or any other unanticipated event may occur, so we should always be prepared to handle the financial consequences. This is why I cannot stress the importance of setting up a strong emergency fund. Without one, you’re vulnerable to all kinds of unexpected financial setbacks. This includes an increased likelihood that you will have to take on debt.
Paying off debt – There is no good reason to hold onto debt any longer than necessary. In fact, because of the steep interest rates for many loans, you could pay significantly more in interest than the amount you originally borrowed. So get rid of your debt ASAP. It will allow you the ability to save and invest in more meaningful goals.
In the case of David and Karen, they put forth the effort needed to become more confident with their money choices. They were able to gain a feeling of security that comes with a solid plan. They knew that even if life went awry, they had resources in place to manage it.
And you, too, can feel that same sense of relief.
While the process of prioritizing your financial goals will not come easily, with sound financial planning, you can create a well-rounded budget that will help tackle your money-related ambitions — some of them simultaneously, in fact.
Just remember to separate your need-based goals from the desire-based ones. Prioritize retirement, emergency savings, and paying down high interest-rate debt first and you should be well on your way.
Pathfinder Planning LLC is a registered investment advisor in North and South Carolina. For more information, visit www.pathfinderplanningllc.com.