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Prioritizing your finances, step-by-step

If there were such a thing as Financial Attention Deficit Disorder, many Americans would swear they've got it.

Should you save for your children's college education or pay off your mortgage early? Max out your retirement savings or pay off maxed-out credit cards? When there are so many priorities constantly competing for your attention, it can seem impossible to focus on your top money goals.

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That's why many experts suggest focusing on one financial priority at a time. The idea is that you'll feel more organized, and achieve success more quickly, if you tackle just one task until you've completed it.

Dave Ramsey, a nationally syndicated radio talk-show host and author of The Total Money Makeover, is a passionate proponent of setting financial priorities. "Focused intensity is probably the most important factor in making the step-by-step financial approach work," says Ramsey. "Aiming at the goal and nothing else is the only way to win."

Ramsey advises people to start with the boring basics: a savings account and a plan to pay off all non-mortgage debt.

"While you have debt, you don't have the money to put toward savings," he says. "But once you don't owe anything, you can use your best wealth-building tool -- your income -- to save for other things."

To prioritize your financial goals, follow these steps. And remember: Do not pass "go," collect $200 or move on to the next step until you fully complete the step you're on. That's the power of focus.

Step 1: Create a "starter" emergency fund.
Sell your late aunt's hideous set of china on eBay, make only the minimum monthly payments on your credit cards or cut back on fancy restaurant meals until you've socked away $1,000. People with higher incomes or who expect big emergencies down the road might consider saving more.

This small reserve fund will help you pay for unexpected expenses so you can stop relying on credit cards. A good place for your emergency fund is in a bank money-market account or a money-market mutual fund.

Step 2: Pay off all your debts (except your mortgage), one at a time.
This step could take you a while to complete, depending on how much debt you carry.

Many financial planners advise their clients to pay off their highest-interest-rate loans first. If that appeals to you, make it your plan.

Ramsey suggests an alternative approach.

"List all of your debts, smallest to largest, including medical debts and debts to parents," he suggests. "Now pay off your debts one at a time, smallest to largest. Don't worry about paying off the debt with the highest interest rate first. This approach gives you some quick wins. It's like losing five pounds in the first week of a diet."

Step 3: Build up your emergency fund with three to six months of living expenses.
Now is the time to go beyond the starter fund of Step 1. Expect the unexpected. You might face a medical emergency, a family member could lose a job, or the car might need a new transmission.

"I can't overstate the importance of having this emergency fund," says Bonnie Hughes, a certified financial planner with A & H Financial Planning and Education Inc.

"It's always very unfortunate when employees are laid off. It's even more unfortunate if they don't have a cushion to absorb their normal monthly expenses," says Hughes. "An emergency fund can create a safe harbor between the time you get laid off and the next job, can supplement unemployment benefits, or -- if you get another job right away but have to move for that new job -- can allow you the cash flow necessary to make that process go more smoothly."

A great way to boost your emergency account: Tuck your tax refund or an unexpected bonus into a money-market fund.

 

 
 
-- Updated: April 20, 2005
   

 

 
 

 

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