A Balancing Act: Prioritizing Multiple Financial Goals
Managing goals and priorities is truly a balancing act.
No matter how much money you make or how much money you have, you likely don’t have enough to buy everything you want. It’s always necessary to decide what’s most important to spend your money on, and how much you should spend on each item or goal, in order to achieve your life goals and your optimal outcomes. Managing multiple financial priorities is hard, and you can tackle those priorities by first defining and optimizing your outcomes, as well as your potential outcomes.
Optimizing Your Goals
Deciding how to prioritize your goals is a function of using three variables as a starting point for optimizing your outcomes (known as EBS):
How much you Earn
How much you Borrow
How much you Save
It’s important to define your financial future in terms of optimizing what you have to work with inside your financial toolbox. This toolbox includes what you earn, what you can borrow, and how much you have left over to save and invest.
Oftentimes, people spend lots of time and energy trying to figure out how to get the best interest rate on a savings account, and not enough time on whether enough money is being saved in the first place. Here’s where the word budget comes in. Many people see budgeting as giving up freedom, but it is actually a very empowering thing to do for one’s financial security. It can be a tough process to get started. It takes effort, time, and research to get started on budgeting. To complicate matters, this optimization process isn't static.
Further complicating the optimization and budgeting is the life stage you happen to be in.
General Life Stages
These are the four general life stages that we can typically define for people, and of course, there's crossover and variation for everyone.
Early Career
Mid-Career
Late Career
Retired
The targeted financial and personal goals vary by life stage and shift over time. Once you've figured out what the optimal relationship for earning, borrowing, and saving is for yourself, you immediately have to begin considering how that might change as you progress through your current stage into the next. Nobody can predict the future, but by considering different scenarios and adopting an effective planning model, you can navigate life transitions and make informed decisions.
Goal Planning
Effective goal planning involves both qualifying and quantifying your objectives. By asking specific questions about each goal, such as the desired outcome and satisfaction criteria, you can articulate your goals more precisely. Quantification involves determining the current cost of the goal, considering inflation and investment growth rates, and identifying the resources needed to fund it. These resources may include personal savings, retirement accounts, equity in properties, inheritances, and other potential income streams. Additionally, considering the rate of investment growth and evaluating your risk tolerance is crucial for successful planning.
Budgeting
Another crucial aspect of goal planning is aligning financial decisions with personal aspirations. This involves understanding one's goals, prioritizing them, and determining the necessary resources to achieve them. Budgeting plays a significant role in this process, as it helps individuals make informed decisions about their money and allocate it towards their most important objectives. Creating a budget is a crucial step in goal planning. It involves determining living expenses, identifying areas where savings can be increased, and making necessary adjustments to ensure sufficient funds are available for achieving goals. It is also important to consider in your budget your insurance policies, such as property and casualty coverage, as well as employer benefits like long-term disability and life insurance, to protect one's financial stability.
Prioritize Your Goals
Prioritizing goals requires individuals to consider their current income, expenses, and savings. It is common for people to prioritize fixed expenses first and then save whatever is left over. However, this approach often leads to neglecting long-term financial goals. Instead, it is recommended to prioritize saving for future goals first, then cover fixed expenses, and use the remaining funds for discretionary spending. This mindset shift helps individuals make their financial goals a priority and live within their means.
Utilize Financial Planning Tools
To effectively plan and evaluate goals, it is helpful to utilize appropriate tools. Online planning tools can provide access to databases, rates, and prioritization strategies in one place. While spreadsheets can be used, professional guidance or comprehensive online tools are often more beneficial, especially as goals become more complex over time. These tools can help individuals navigate changes, evaluate their financial situation, and assess the solidity of their projections.
Challenges and Trade-Offs
Prioritizing goals often requires making difficult choices and trade-offs. Not all goals can be pursued simultaneously, and it's essential to distinguish between essential and non-essential objectives. By ranking your goals and considering different scenarios, you can evaluate the impact of funding decisions on your overall financial plan. Some goals may require partial funding, while others may need to be adjusted or even relinquished entirely. It's important to understand the implications of these decisions on your quality of life and desired outcomes.
Strategies for Success
There are various strategies and techniques to help you successfully manage multiple financial goals.
Establishing Clear Priorities:
Learn how to identify and rank your financial goals based on their importance and urgency.
Creating a Comprehensive Budget:
Discover the importance of budgeting and how to create a realistic and effective budget that aligns with your goals.
Maximizing Earnings Potential:
Explore strategies for increasing your income, such as seeking additional sources of revenue or advancing your career.
Efficient Debt Management:
Understand how to optimize borrowing by minimizing interest payments and strategically using debt to support your goals.
Building a Strong Savings Foundation:
Learn how to save effectively by automating your savings, taking advantage of tax-advantaged accounts, and optimizing investment strategies.
Adapting to Life Stages:
Explore specific financial considerations and strategies for each life stage, from early career to retirement.
Mitigating Risks:
Understand the importance of risk management and explore strategies for protecting yourself and your assets, such as insurance and emergency funds.
Harnessing the Power of Compound Interest:
Discover the long-term benefits of compound interest and how to leverage it to accelerate your progress toward financial goals.
Seeking Professional Guidance:
Learn when it's beneficial to seek the expertise of financial advisors or planners to help optimize your financial strategy.
Balancing multiple financial goals is a complex endeavor, but with careful planning and prioritization, it can be achieved.
By optimizing your earnings, borrowing, and savings, you can maximize your resources and work towards your desired outcomes. Considering life stages and adapting your strategies accordingly is vital for long-term success. Effective goal planning involves qualifying and quantifying your objectives, allowing you to make informed decisions. While problems and challenges may arise, having a solid prioritization process can help you make the best choices for your financial future.