Prioritizing your finances,
If there were such
a thing as Financial Attention Deficit Disorder, many Americans would swear they've
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.
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
"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.
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
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.
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.
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.
overstate the importance of having this emergency fund," says Bonnie Hughes,
a certified financial planner with A
& H Financial Planning and Education Inc.
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."
great way to boost your emergency account: Tuck your tax refund or an unexpected
bonus into a money-market fund.