What is the most important thing you could be doing with your money?
Many consumers don't stop and ask themselves that question. As a result, when they look at their finances, they are often disappointed to discover that they don't have the money required to do the things they want. Whether you're making sure that your credit is in order so that you can get an auto loan or saving for retirement, it's important to understand your financial priorities.
As you prepare to improve your finances, understand that setting the right financial priorities can go a long way toward ensuring that you reach your goals.
Figure out what's most Important to YOU
"Determining financial priorities is extremely individualistic," says Keith Klein, CFP, and owner of Turning Pointe Wealth Management.
Klein recommends that you start out by looking at your own situation and figuring out what's most important to you at this time, rather than relying on what others find important.
"For some clients, because of their age, saving for retirement should be the first priority," Klein says. "Taking steps to achieve other goals should be next in line."
Don't forget to look at your own lifestyle and determine your own values. Think about what you want your money to accomplish on your behalf. If you want to give to charity or to travel, you need to put those items ahead of things like eating out or buying expensive clothes that you don't really need. Think about what motivates you, and focus on those things first.
While you do need to take care of obligations like housing, food, and debt, you can prioritize your other spending so that it is more in line with your values. Experts estimate that the average household wastes between 10 percent and 15 percent of its income each month. Track your spending to determine which items you're spending on that you consider "waste," and then cut them out. Then you can focus the savings on your financial priorities.
Understand the Trade-offs
When you spend money on one thing, it affects your ability to spend on others. This means that you need to think about your decisions and determine what you would rather have your money go toward.
When you realize that your financial situation is described more as a series of priorities and choices, it can help you decide what is most important. If you know that you want to buy a home soon, you can focus on the actions that will allow you to improve your credit situation (so you qualify) and that provide you with a way to save up for a down payment. This might mean that you push other, non-essential expenses further down the list.
Determine what's important to you, and then assess the trade-offs you will make. Once you understand how you're directing your financial resources to certain ends, and once you recognize which items matter most to you, it's possible to start prioritizing your spending in a way that makes sense for your situation.