How to Prioritize Financial Goals

Here's how to prioritize your financial goals

The guys got a great listener question a few months ago — from a husband and wife team who listen to the podcast together! — and are taking it on for this episode.

The question: how much should you save and invest if you have debt?

This is a good one to cover, because it’s difficult for most people to get through life without taking on any debt at all. Most of us don’t have over a hundred thousand dollars lying around in cash to put down on a home, or that same amount again to pay for higher education costs.

So we take out mortgages and student loans. (Or we just don’t yet have good money management habits and end up overspending on the credit card.)

Whether it’s good debt or bad debt, chances are you’ve had a little bit of it — which means you’ve had to juggle multiple financial goals, too.

We need to save and invest wisely for retirement, establish an emergency fund, repay debts (be it consumer credit card debt or a car loan or a mortgage),and more.

The Basics of How to Prioritize Financial Goals

Brian and Bo go over some of the basics that we can all abide by when it comes to prioritizing financial goals:

  • Pay yourself first: That means taking care of your retirement needs first. You need to be able to take care of yourself financially (now and in the future), so this should almost always be at the top of your priority list.
  • Have an emergency fund: Again, this goes back to taking care of yourself. That emergency fund will help safeguard you against unexpected expenses that could push you into debt.
  • Get rid of debt: Once you’ve secured your savings, it’s time to look at aggressively paying down any debts you may have.

The exception to this order? When you have high-interest rate debt. Usually associated with credit cards, debts with interest rates over 8% or so are your financial emergency, and need to be addressed immediately. That doesn’t mean sacrifice savings entirely — but it does mean making room in your budget to pay down debt.

Ideally, you’ll be saving 15% to 20% of your gross income for your retirement. But that may change depending on your debt situation. Again, it all depends on that interest rate.

Avoiding Money Wasters

Prioritizing your goals will get a lot easier if you can avoid some financial pitfalls that many Americans succumb to. The guys took a look at a list republished by J. Money at Budgets Are Sexy to see what average people wasted the most money on.

One of the biggies was no surprise: credit card debt. This is a huge waste of your hard-earned money and a great reminder of the importance to live within your means and avoid spending more than you can truly afford.

Others that Brian and Bo point out are deal websites (with a great quote from another financial blogger, Frugalwoods) and fees (along with a tip on getting out of them from time to time).

Financial Lessons Learned at FinCon

fincon

Brian and Bo made their first appearance at FinCon this year and share their experiences with you. They also discuss when it makes sense to be a tightwad versus when you should pay the extra money for professional help.

Brian and Bo start by reviewing a few tips found in Damian Davila’s article on WiseBread, “4 Times You Should Splurge and Hire a Pro.”

Moving – 12% of Americans moved from 2012 to 2013. This is an area that we consider to be worth paying the extra money for professional expertise. Movers offer a few great benefits: they save a ton of time and effort, you can add insurance, you do not have to risk injury, and if you are moving more than 50 miles for work – your moving expensive could be tax deductible.

Tax Preparation – Paying for a CPA is almost always a great idea, especially if you are a freelancer or entrepreneur. There are too many items to overlook, and too many mistakes to be made that could cost your business money. As we have always said, when dealing with your tax or legal issues it is always better to pay a little more to have someone to lean on if things were to go awry.

Cleaning for a Move or Home Sale – Cleaning stinks. Paying someone else to clean your home for you can be a huge relief. No more arguing about whom is going to do what or spending a day wearing rubber gloves. It can actually save you money if you hire someone to clean for you, because you can spend your time and effort being productive at work or networking.

Tree- Trimming and Removal – This seems like a no-brainer. There is too much to go wrong for it to makes sense to be a tightwad in this department.

The Money-Guys added an additional 4 areas that constitute hiring a professional:

Mechanic Work – If you are not an expert, you could do more harm than good. Often times the major problem you are facing is a minor or common issue for a professional.

Yard Work – Believe it or not, you can save money by having someone maintain your yard, especially if you have been trying to have that perfectly green lawn by yourself. Frequent trips to the local hardware store for fertilizer can actually cost you more than professional maintenance. The pro’s probably have better resources and methods to make your yard look better than you ever could.

Financial Advisor – We have a great podcast that is always free, titled, “Knowing When to Go Pro.” This is a topic that our podcast has been centered on for a long time. When financial moves become too significant for you to handle, hiring a pro can bring a ton of value to your financial life. We think that threshold is somewhere around the 250k mark in investable assets. Until then, it probably does not make great sense to spend money on a financial advisor, especially when target date retirement funds have become so efficient.

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep