“Build your emergency fund.” “Invest in retirement.” “Pay off your debt.”
The more I write about personal finance, the greater the complexities I discover when it comes to prioritization. For those just starting on the path to a healthier financial future, Dave Ramsey's 7 Baby Steps might just be the ticket. But over the course of time, very difficult questions arise. Dare I say there might be a few exceptions to following the steps in order? There are short term circumstances that might permit a slightly different plan.
The strength of Dave Ramsey's plan comes from the wisdom behind the order of the steps. There's a certain elegance to the prioritization and principles guiding each step. He eases you into an emergency fund in Baby Step 1 and then completes it in Baby Step 3. He breaks through smaller, riskier debts in Baby Step 2 and destroys the larger ones in Baby Step 6.
Where Are You In Your Finances?
While I widely recommend following the Dave Ramsey methodology, you owe it to yourself to decide what's important in YOUR situation. For example, you might have a pressing medical issue that should come before paying off your debts. By all means, stop your Total Money Makeover and get it done! Dave even allows for this. Don't get so locked into the plan that you aren't thinking through your personal situation.
So, where are you at in your personal finances? What are your dreams and goals? What are your struggles that need to be overcome? All of these questions come into play.
Elements of Prioritization
There are several moving parts to this puzzle. First, make a list of all your financial goals and current obligations. Then take into consideration the following elements:
- Risk. When you're deciding on which loans to pay off first, take into consideration the risk not paying a particular debt. Some debts need to be paid quicker than others. Risk also is important to measure when you're dealing with investments. Are your investments diversified?
- Time. Due dates matter a lot. Some bills are due monthly, others are due annually. Figure this into the equation when you're prioritizing your budget. Try accomplishing the tasks that don't take a lot of time first. Your to-do list will get shorter and you'll feel less overwhelmed!
- Money. The amount of money involved in a transaction can determine how you prioritize. Focus on those things that will bring in the most income, or save you the most dollars and cents.
- Behavior. It's not always about the math. Sometimes you simply have to prioritize those things that will compel you to move forward. A great example of this is Dave's version of The Debt Snowball. It's not the interest rate that matters most, it's the principal balance. Paying off the smaller debts first encourages you to continue paying off other larger debts.
- People. We all have people in our lives that want us to do this or that with money. That's not a bad thing, it's normal! The only question is: should we take their advice? Or perhaps someone in your family is in financial hardship and you're considering helping them out. Should you put them before your personal finances? People are a very important factor to consider when you're prioritizing your goals.
- Faith. Don't leave God out of the mix. Pray that you'll make the right decisions for you and your family. If you're not sure which direction to go, take your time. Don't rush things!
These are just a few general elements of prioritization to ponder. Don't stop there! Make sure to thoroughly investigate each of your options and find the motives behind your decisions. That way, you'll rest assured that you made the best possible choices.
Have you ever had a time in life where you didn't prioritize your finances correctly? What could you have done differently?