There’s no one-size-fits-all financial advice because everyone’s financial priorities are different. And even when two people share similar financial goals, they can take several routes to reach the same destination.
So how do you determine your financial priorities? How do you achieve them? And perhaps most importantly, how can you bend the rules to work toward several goals simultaneously?
Welcome to your official financial priorities cheat sheet.
Common Financial Priorities
Everyone may be unique, but most of us share a few common goals. Some of these goals are universal ones that we all must – or at least should – achieve, such as having an emergency fund and enough money to retire.
Here are eight of the most common financial priorities to spur your thoughts before you go through the exercise of choosing and executing your personal priorities.
1. Paying Off Debt
Debt comes in many forms, from student loan debt to credit card debt to mortgage debt. And not all debt is created equal. High-interest debt, such as credit card debt, should take priority over low-interest debt such as a mortgage against your home. That helps make decisions such as whether to pay off student loans before paying off your mortgage easier.
Paying off high-interest (10% or higher) debt should typically take priority over every other goal on this list. The reason is simple: You have a choice between a guaranteed high return on your money by paying off the debt, compared with a possible return – or even losses – when you invest money elsewhere.
If you suffer under the weight of high-interest debt, learn how the debt snowball and debt avalanche methods work. They offer time-tested techniques to pay down your debt fast. And remember that you may have additional options for tackling your debt. For example, some borrowers are eligible for student loan forgiveness programs. Another option is to use a personal loan from Credible to consolidate your debt under one low interest rate.
2. Saving for an Emergency Fund
Some people need a larger emergency fund than others. If your income and expenses are steady month in and month out, and your job is secure, then you don’t need as much of an emergency fund as someone with fluctuating income or expenses. But those with irregular incomes have their own challenges in saving for an emergency fund.
Others have enough fallback options that they need very little in their emergency fund. For example, a person with an unused HELOC through Figure.com or low-APR credit card can always draw on these lines of credit in a pinch. Likewise, a person with plenty of low-risk investments can lean on them with less fear of a crash gutting their value.
As a general rule, though, aim for one to three months’ expenses in your emergency fund if you have stable income and expenses, and three to six months’ worth if you tend toward irregularity.
3. Buying a Home
The median American homeowner has a net worth of $231,400. By contrast, the median renter only has a net worth of $5,000, per the 2016 Survey of Consumer Finances by the Federal Reserve. In other words, the typical homeowner’s net worth is over 46 times higher than their renting counterparts’. That’s a compelling argument to become a homeowner.
But buying a home costs a lot of money – usually tens of thousands of dollars in down payments, closing costs, and cash reserves (which offers some insight as to why homeowners typically have a higher net worth than renters).
Saving up to buy a home doesn’t have to be a brutal slog, though. Would-be homeowners can take advantage of the first-time homebuyer tax credit, along with a slew of other strategies (more on those shortly).
Finally, bear in mind that not all homeowners are laughing all the way to the bank. Despite their higher net worth, CNBC reports that nearly two-thirds of millennial homeowners regret buying a home. Read up on the mistakes many first-time homebuyers make so you know how to avoid them.
4. Saving for Retirement
The only way to not need retirement savings is to die young – hardly an enviable strategy. So while the other financial priorities on this list depend on your personal needs and desires, retirement savings are something everyone needs.
Fortunately, you have plenty of options at your disposal to save and invest for retirement. The easiest are IRAs and Roth IRAs through a company like Betterment because anyone can open one regardless of their employer. But many employees also have access to 401(k)s or 403(b)s or SIMPLE IRAs through their jobs, which expand their annual contribution limits. Even after hitting your annual ceiling, you can still invest through your regular brokerage account. There are also a few ways to cheat (more on those shortly). You could also start investing small through Acorns. This app rounds up each purchase you make with your debit and credit card and invests the difference.
If you’re new to investing, start with these ideas for how to start investing with under $1,000. Don’t put it off; your greatest ally in the quest for retirement is compounding, which takes decades to work its most powerful magic.
Pro Tip: If you have a 401(k) through your employer, sign up for a free analysis from Blooom. They will make sure your account is diversified, has the proper asset allocation, and that you aren’t paying too much in fees.
5. Saving for Your Kids’ College Education
Not everyone has kids, and even among those who do, not every parent plans to pay for their adult children’s education. But many do, and it proves a daunting challenge. Over the last 30 years, college tuition has more than tripled, even after adjusting for inflation, so parents increasingly look to creative ways to save for college.
If you want to help your kids with tuition, consider using a 529 plan so your savings can grow tax-free.
6. Starting a Business
Ready to fire your boss and storm out of the office in a blaze of glory?
Launching your own business isn’t as easy as TV shows make it look. Even when you turn your hobby into a money-making business, it still takes money.
Granted, saving up startup capital isn’t your only option. You can take several approaches to raise money to start your own business, although they all come with some element of risk and cost. You can also keep your costs low by launching a virtual business.
Money isn’t the only obstacle to starting a business, though. Before getting too far along in your daydream of being your own boss, do your homework on what else it takes to start a business.
For those willing to take that leap of faith, few experiences in life are as rewarding and challenging as starting a business. It forces you to push your boundaries – not always a comfortable experience, but one that inevitably leads to growth.
7. Financial Independence & Retiring Early (FIRE)
A small but growing portion of the population have set their sights on financial independence and early retirement (FIRE) as their primary goal.
Financial independence means being able to cover your living expenses with your income from investments. Put another way, it means making your day job optional.
Most people don’t reach financial independence until they retire, but no one says you have to work for four or five decades to achieve financial independence. If you keep your living expenses modest and invest the majority of your income, you can generate enough passive income to live on within five or 10 years.
While it’s certainly a less conventional goal, the idea of a job-optional life is hard to dismiss.
8. Become a Millionaire & Accredited Investor
A million dollars doesn’t mean the kind of wealth it once did. A net worth of $1 million only generates $40,000 per year, based on the 4% rule of retirement planning.
That’s a decidedly middle-class lifestyle you might be OK with, but people with an investable net worth over $1 million qualify as accredited investors, giving them access to a set of investment options not available to the rest of us. By that metric at least, they qualify as “rich.”
Regardless of what it means to legally to be a millionaire, most people simply love the sound of it. Being a millionaire remains synonymous with having “made it” in our society, even if it doesn’t carry the same purchasing power it once did.
It’s a fun goal, if an arbitrary one. And it’s one that most young people find attainable; 53% of millennials believe they’ll be millionaires one day, according to a study by TD Ameritrade.
Identifying Your Personal Financial Priorities
I’m guessing at least a few of the financial goals outlined above resonated with you. But it’s far from an exhaustive list, and you probably have another goal or two ricocheting around in your mind. Follow this exercise to identify your own priorities – and then to achieve them.
Step 1: Make a List
Just start writing. Forget about what’s realistic or unrealistic, what order the list should be in, or any other pesky details. In the beginning, you just want to brainstorm and get all your financial goals and priorities down in writing.
Some of them will be silly, even embarrassing upon reflection. That’s OK; this isn’t the time for reflection. For good measure, include your childhood dreams as well. You might just decide they’re worth pursuing after all.
Step 2: Prioritize the List
Now it’s time for reflection.
Start reordering your list with your top priorities first. While it’s your list and you can order it however you like, these suggestions can help:
- If you have credit card debt, put it at the top of the list.
- If you live paycheck to paycheck and have no savings, make it a priority to save at least one month’s living expenses as an emergency fund.
- Include retirement investing in your top three.
If you struggle with prioritizing your goals, ask yourself a few simple questions, such as: “If I de-prioritize this, what are the consequences?” and “Are there other options available to achieve the same result, other than throwing lots of money at it?”
For example, many parents don’t know how to prioritize between their kids’ college tuition and their own retirement planning, but applying the questions above reveals retirement planning is the more urgent priority. That’s because there are many ways to pay for college other than you scrimping and saving. And even if there weren’t, college would still take a backseat to retirement planning, because your kids can take out loans for college, but you can’t take out loans for living expenses in retirement.
Step 3: Take Action on Your Priorities & Track Your Progress
Draw a line separating your top three priorities from everything else. These are your main focus; the rest can simmer on the back burner. Start funneling your monthly savings into these top three priorities – and potentially only the top one or two.
Be sure to track your progress toward these goals every single month. The exact measurement depends on the goal. For example, if your goal is paying off your student loans, then your remaining balance and the amount you’ve paid off to date are your key metrics.
Two metrics you should track each month, no matter what, are your savings rate and your investable net worth, which can be done through Personal Capital. By maximizing these, you can’t help but improve your overall financial health and progress toward your other goals.
Step 4: Revisit Your Financial Priorities Every Year
Your finances are not static. They constantly shift and evolve, as must your prioritization and wealth-building strategies.
For instance, when you pay off your student loans, that goal disappears, and you can raise another priority. Or if you suddenly find yourself expecting a child, buying a house might leap to the top of your priority list.
But even in the absence of such radical changes, you should still revisit your financial goals and priorities every year. Over time, subtle shifts in your finances and needs can take place without you consciously being aware of them. Set aside time at least once per year to scrutinize your goals and update your priorities accordingly.
How to Reach Several Goals Simultaneously
Sometimes, you really can kill two proverbial birds with one stone. Here are a few “cheats” to help you work toward several goals at once and take the edge off of choosing between your high priorities.
1. Take Advantage of Roth IRAs’ Flexibility
Roth IRAs are the most flexible tax-sheltered accounts available to you. Take advantage of them.
You can pull out your contributions at any time, for any reason, with no tax penalty. So while they’re intended for retirement savings, you can use Roth IRA funds for your kids’ college tuition, for a down payment on a house, as an emergency fund, or because you want to turn your van into a dog. (Not that I recommend that last one, but you technically can do it.)
First-time homebuyers can also withdraw up to $10,000 of earnings penalty-free and tax-free. Even traditional IRAs, SEP IRAs, and SIMPLE IRAs allow you to withdraw up to $10,000 of contributions penalty-free, although you’ll need to pay the back taxes on the withdrawal since you dodged them when you first contributed the money.
Read up on the full rules if you do want to use IRA funds to buy your first home.
2. Use HSA Hacks
While health savings accounts (HSAs) can only be used for medical costs, you’d be surprised by how much flexibility that leaves.
The intended use for HSAs already serves multiple purposes:
- To save money for medical emergencies
- To save money on health insurance premiums
- To save money on taxes
HSAs offer the best tax savings of any account available in the United States. Funds are shielded from taxes in three ways: contributions are tax-deductible, the money grows tax-free, and withdrawals are tax-free when used for health-related expenses. But you can also get creative with HSAs to make them even more flexible. Think of your HSA as a retirement account first and foremost, an emergency fund second, and a medical reserve last.
In retirement, you will need money for medical expenses. The average couple spends $285,000 on health care between the age of 65 and the time they die, according to a 2019 report by Fidelity. So aim to use your HSA funds to cover these retirement expenses, capitalizing on the better tax benefits you get from an HSA, rather than an IRA or 401(k).
In the meantime, an HSA can serve as an emergency fund. Yes, it covers your medical emergencies, but you can also add flexibility for non-medical expenses. As you incur medical expenses throughout the year, pay for them with non-HSA funds, such as a rewards credit card, if you can afford it; just be sure to keep the medical bills and receipts. Then, if a non-medical emergency hits and you need funds to cover it, you can withdraw money from your HSA to reimburse the previously paid medical bills.
Pro Tip: If you don’t currently have an HSA account, look into Lively. They offer 100% free accounts for individuals.
3. House Hack
House hacking may be the single best move you can make to improve your finances.
The idea is simple: You get someone else to pay for your housing. Because housing is the largest expense for most people, it has the greatest potential to boost your savings rate.
In traditional house hacking, you buy a small multifamily property, move into one unit, and rent out the other. The rent from the neighboring unit pays for your mortgage.
Not only do you get to live there for free, but you score your first rental property. When you move out, you can keep the property as a rental to generate ongoing passive income – income that you can put toward paying down debt, your kids’ college tuition, retiring early, or any other financial priority.
You can also house hack a single-family home; read more about house hacking ideas here.
4. Take Advantage of Matching Contributions
This piece of advice is an oldie but goodie: Always take advantage of matching contributions from your employer. It’s effectively free money. You save more for retirement, you save money on your tax bill, and your employer pays you more. Win, win, win. All of it helps you build wealth tax-free and get closer to becoming a millionaire.
Life comes with tradeoffs. You can’t do everything all at once. But you can achieve your highest financial priorities if you keep your focus on them. And you can even bend the rules by adding flexibility and making progress toward several goals simultaneously.
Follow the steps above, take advantage of the cheats, and most importantly, maximize your savings rate. Every financial priority has one thing in common: The more money you put toward it, the faster you reach it.
What are your financial priorities? What are you doing to reach them? Do you have any fun cheats to share?