How To Prioritize Your Financial Life

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Shari L Wyse, CFP®

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Wyse Financial Group
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When it comes to financial planning, there are many different approaches. One of the biggest challenges people face is prioritizing their needs. Often, individuals confuse importance with urgency, assuming that the closer a deadline, the more important the task. While this mindset is understandable, it may not be the best way to approach financial planning.


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Prioritizing your financial life may help you feel more organized (Getty)

Here is a suggested order for prioritizing finances, although it’s important to note that this is not a one-size-fits-all approach. Everyone has unique circumstances, and ultimately, only individuals can determine what is most important to them.

Protection

The first priority should be ensuring protection for oneself and one’s family from any tragedy that could derail financial plans. This typically involves having adequate insurance coverage. Life, disability, long-term care, property and casualty, and health insurance are essential. Without proper insurance, a financial plan can be built on shaky ground, and a single unexpected event could cause significant financial hardship.

Destructive Debt

Next is addressing destructive debt, particularly high-interest debt such as credit card balances. It’s important to differentiate between this and other forms of debt, such as mortgages or car loans. High-interest credit card debt can crush financial progress, and a well-thought-out plan to eliminate it—and prevent it from reoccurring—is crucial. Without addressing this, individuals can remain stuck in financial stagnation for years.

Emergency Savings

Having 3-6 months of expenses saved in an accessible, liquid account is vital. The location of the savings is less important than ensuring the funds are available in case of an emergency. Many people end up with high-interest debt because an unexpected expense derails their finances. A nest egg can provide protection against these financial shocks.

Retirement Savings

Many people are not saving enough for retirement, which can lead to a situation where they are forced to retire without the financial means to sustain their lifestyle. It’s important to remember that one cannot borrow for retirement. Starting early and putting effort into retirement savings can make a significant difference in being able to enjoy a comfortable retirement.

Other Savings Goals

Once emergency savings and retirement are on track, attention can be turned to other savings goals. This could include saving for children's college tuition, purchasing a second home, or funding a large project. While these goals may be important, they are typically not critical to a financial plan, and in some cases, there are other ways to achieve them, such as through borrowing.

Constructive Debt

The next priority is constructive debt, such as mortgages or car loans. There is often little financial benefit to aggressively paying off this type of debt, though doing so can provide peace of mind. Paying off a home can also serve as a mental shift, preparing individuals for the next stage of life.

Charity

Although charitable giving is placed last in this order, it is by no means the least important. In fact, for many people, it is one of the most important aspects of their financial plan. For those who prioritize tithing or regular charitable contributions, it may come much higher on their personal list. From a strictly financial perspective, however, it may be advisable to ensure that the other aspects of a financial plan are in order before prioritizing charitable giving.

This approach works well for many, but it’s important to recognize that there are always exceptions. Each individual’s circumstances are different, and it’s perfectly reasonable to adjust these priorities based on personal needs and values.

By Andrew Rosen, Contributor

© 2024 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

Shari L Wyse profile photo

Shari L Wyse, CFP®

Financial Advisor ǀ President
Wyse Financial Group
Office : (567) 444-5540
Contact Us Today