Why it is important:
Until you prioritize what you’d like to spend your money on, it is impossible to know what expenditures are worthy of your hard-earned money. Once you have a good idea around this, you can begin to make informed decisions to help you achieve your financial goals.
Would you rather lease that car, or retire 2 years sooner? Do you find more value in taking nice family vacations every year, or paying for your child’s college? Perhaps when you read those, the choices were obvious to you. The truth is there is no right answer and you may have different desires than the next person reading this. The answer lies in what is going to be most meaningful to your own life. Nobody can help you make informed financial choices (not even yourself) until you sit down and prioritize what things you need to do, what you want to do, and what you wish you could do.
Why we put it off:
Sometimes documenting all of your financial goals can feel like you are trying to budget every penny for the rest of your life. It can quickly become overwhelming. Instead, think of this process as looking at all of the things you get to spend your money on. Have fun with this and don’t get overwhelmed. All you can do is plan for what you know today, so don’t try to do anything more than that. Once you have a starting point, then you can make adjustments along the way (there will be many, and that’s okay).
People often ask me “What stock should I buy?” or “What can I do to retire early?”. You’re on the right track to think about these things but first you need to ask yourself “Why?” instead of “What?”.
Why do you want to retire early? Is this more of a priority than saving for college or going on vacation? Why are you interested in buying stock? Is it because you have an interest in the stock market as a hobby, or are you hoping to significantly outperform the overall stock market to be able to retire when you’re hoping to?
The only way to get meaningful answers to any of these types of questions, to quote Stephen Covey, is to “Begin with the end in mind”. To do that effectively with your finances, first you need to answer the question of what you’re wanting to do with your money, before anyone can tell you what to do with your money.
The answer to the same question may be very different for someone that likes to stay home and read verses someone that wants to travel the world when they retire. Until you truly sit down and think about these things (and discuss them with your spouse!) you’re not really in a position to plan for much of anything.
The plan:
I suggest making 3 columns on a sheet of paper titled “Needs”, “Wants” and “Wishes”. Start with retirement and healthcare in the “Needs” column. From there, fill in any of your larger financial goals or one-time expenses such as travel, home improvement, college, wedding, vehicles, vacation home, boat, gifts, etc.
Not sure if you can afford it but want to find out? Put it in the “Wishes” column. Can’t live without it? Put it in the “Needs” column. Then when it comes down to making choices, you’re a step ahead of the game.
Don’t get too granular here – we’re not asking you to account for every Starbucks coffee. Just the big ticket items, or things you’ve thought about but always wondered if you’re able to afford or not.
Next, jot down approximately what you estimate each of these goals may cost (in today’s dollars) and the frequency. For example, New car every 10 years, $25,000.
Implementation:
Since money is a limited resource, and it seems there are an unlimited number of things we can spend it on, prioritizing your financial goals is one of the first steps to creating a well thought out financial plan.
I suggest organizing this in a quality financial planning software (I use MoneyGuidePro) or working with a financial professional (see What to Look for in a Financial Advisor) if you don’t already have one. A good fee-only, fiduciary, CERTIFIED FINANCIAL PLANNER™ will be able to help you navigate all of your “what” questions, as soon as you know “why”.
