How To Establish Financial Priorities

The most difficult part of establishing financial priorities is dealing with the fact that they are always changing. Life is constantly in motion, which means we have to continuously reevaluate our goals. Here is the method I use to attempt to simplify the chaos of life into a concrete set of financial priorities.

Photo by Christine (bpc)

The Necessities

The idea is pretty simple — put everything you absolutely need in order to survive at the top and then sort out the rest. For most humans, this list is probably pretty accurate:

• Food
• Water
• Shelter

Unless you’re Survivorman or Bear Grylls, you’ll probably need a job or some other source of income to get food, water, and shelter. This usually means you’ll have to pay for some form of transportation to get to and from work, so let’s add that to the list of necessities.

• Transportation

The Emergency Fund

As I mentioned before, life is chaotic. No matter how hard we try to plan things out, the unexpected always happens. It could be anything from a medical emergency to suddenly losing your job. No matter what it is, the best way to be prepared for the unexpected is to have an emergency fund.

While pretty much every personal finance expert agrees that emergency funds are necessary, there’s no agreement on how much is enough. On the low end, some say $1000 is enough. On the higher end, some recommend six months worth of living expenses. My emergency fund is currently somewhere in between the two (about three months worth of living expenses). You will have to examine your own situation and decide how much is right for you.

Debt

Now that you have enough to cover the basics for survival, it’s time to tackle your debt. I know it’s tempting to skip this step and jump straight to the next section, but you’ll only be digging yourself into a deeper hole if you do. While I’m rather fortunate to only have student loan debt at the moment, I know others may not be as lucky.

As far as debt priorities go, getting rid of credit card debt should be your top priority. Not only will this save you a ton of money in the long run, it will be a huge burden off of your shoulders when you get it paid off.

Everything Else

I think the biggest challenge in establishing financial priorities is keeping this category at the bottom of the list. This category is for everything that we don’t really need to survive. It’s for all of the stuff that we really, really want but don’t really need. To often it becomes the stuff that we can’t really afford. It’s the cool gadgets and the latest styles.

So what’s the trick to avoiding the trap? I regularly reevaluate my financial priorities to identify areas that could use improvement. It’s the reason I decided to reduce my student loan payments a couple months ago. Instead of focusing on paying off my student loans, I built up my emergency fund and started to invest more money in my retirement funds. Meanwhile, I continued to chip away at my student loan debt, while resisting the urge to blow money that I don’t have on everything else.

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