When it comes to financial success, a good financial plan and setting goals are essential. However, once you have a plan and goals, how do you determine which ones to tackle first? How do you prioritize?
I suggest using the FI Woman™ Financial Priority Pyramid shown below.
Budgeting
A good budget is truly the foundation for financial success, and could set the tone for all the other financial decisions that you make. Knowing your cash influx (income), and how much cash you spend (expenses) helps you understand your cash flow. A positive cash flow means that your income is greater than your expenses, and a negative cash flow means your income is less than your expenses.
Tip: Your goal when budgeting is to strive to increase your positive cash flow by increasing your income, decreasing your expenses, or doing both!
Debt Management
Proper debt management is important when striving to create positive cash flow. Debt repayment is an “expense” item on your budget, and the total amount of your debt reduces your Net Worth. Any debt that you have also limits your financial freedom.
Tip: Your goal for debt management is to strive to have ZERO debt. There are good “debts.” For instance, debt that generates income, like the mortgage on a rental property, is a good debt to have. Such debt should ideally result in positive cash flow.
Retirement Planning
Although debt management is prioritized above retirement planning, it doesn’t mean you must achieve zero debt before you begin retirement planning. Instead, when you create your budget, allocate funds to both retirement planning and debt repayment, and allocate a great share towards debt repayment. As you eliminate your debt, shift the freed cash towards your retirement planning.
Tip: Retirement planning can take many forms depending on the type of retirement lifestyle that you want. The most common retirement planning tools are employer sponsored plans like a 401(k), or individually managed plans like IRAs.
Other (e.g. College/Education Planning)
Once you have your budget, debt management and retirement planning figured out, you can prioritize your other financial goals such as college planning. Many people put planning for txheir children’s education ahead of retirement planning, and I think that is a mistake! Although not ideal, if needed, your children can get scholarships and loans to pay for school, while you can’t get a loan to pay for your retirement.
Conclusion
Don’t derail your financial success by focusing on the wrong priorities. Have a plan and then prioritize.
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