Putting financial priorities in order
TERRY SAVAGE firstname.lastname@example.org Jun 11, 2009
Updated: May 3, 2013 12:15PM
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To celebrate the 20th anniversary of my Chicago Sun-Times column, I'll be responding to your most frequently asked questions on a regular basis. Of course, you always can submit individual questions on my Sun-Times blog reached on the home page at www.TerrySavage.com.
Q. How do I set financial priorities?
A. That's a question I hear from many people, and of course there's no simple answer since your priorities depend on your stage of life, your goals, and your current financial system. But don't give up because I can give you a framework for thinking about those priorities -- so you can make sensible decisions for your personal situation.
First, you need to make a list of the financial priorities that apply. These are not only spending priorities, but saving, investing, insuring and "understanding" tasks. Check the ones on this list that apply to you:
**Budget: Figuring out where you stand on a daily and monthly cash flow basis.
**Debt: Creating a plan to pay down debt.
**Savings goals: How much will you need?
**Retirement: Deciding where and how you'll save or, in retirement, how much you can safely withdraw.
**College: Money set aside for children, or grandchildren.
**Life insurance: Do you really need it and, if so, how much?
**Investments: Getting advice for money inside and outside your retirement plan.
**Estate plan: What happens if you don't have a will or living trust?
Don't be overwhelmed by the number of tasks or the difficulty in figuring out which to attack first!
How to establish priorities
There is a simple question to ask yourself (or to discuss with your spouse or partner, if you're planning together).
What happens if I don't?
You don't need to know numbers, or investments, or get sophisticated financial advice to ask yourself this question about each of the topics on the checklist. This is a "gut check." If you cringe at the thought of what's coming if you don't deal with this issue, then it goes to the top of your priority list!
For example, many people do get by without a formal budget or without using software to track spending and payments. For those who cringe because they have no idea where the money went, I recommend Quicken, an inexpensive program found at www.Quicken.com.
But if this same family has two working parents and young children, they would certainly cringe even more when they recognize that they have little life insurance -- or none at all! How would the family survive if one wage-earner were killed in an accident? Even worse, without an estate plan, would both sets of grandparents be fighting over custody?
Those two projects should be top priority and could be accomplished quickly. A young family would purchase the most inexpensive term life insurance on each of the parents. They'd want 20-year level term -- where premiums don't rise and can be budgeted -- with the ability to convert later into permanent life insurance if needed. Get prices at www.Accuquote.com.
For a simple will or, better yet, a revocable living trust, they could check their state bar association or bank trust department for a recommendation. But an elderly couple would want a plan from a more specialized practitioner. They should go to www.NAELA.org -- the association of "elder-law" attorneys.
Paying down debt vs. saving is the most perplexing task when setting priorities. Some of it is simple math: If you're paying high interest rates, getting rid of debt is a top priority. But don't forget the time value of money, which leverages early savings. One solution: a part-time job that brings in more money and allows you to do both at the same time!
Retirement savings vs. college? That's easy. Save first for your own retirement because your kids -- even if well-educated -- are unlikely to take care of you in your old age!
Most people have no idea how much they'll need for retirement. Go to www.choose tosave.org and click on the "ballpark calculator." If you're closer to retirement, it will tell you how much your lifestyle will be reduced if you don't keep working at least part time! Thinking about that possibility might make this task jump to the top of your "queasy list."
A final thought: You can't do all of everything at once. But you can complete some tasks quickly. And you can do a little bit of "everything else" -- paying down debt, saving for multiple goals and tracking your progress -- every day. That's how priorities become realities. And that's the Savage Truth.