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Imagine the following scenario. You are down to your final $100 in your checking account, your savings and emergency funds have been wiped clean, and you’re faced with the following obligations: filling up the gas tank in your car, buying groceries for the week, paying your cell phone bill, and buying birthday gifts for your niece. How would you determine your financial priorities?
Fortunately, most of us don’t face such difficult circumstances when determining how to spend the money we earn, but the overall concept still applies.
Figuring out how to spend your money each month can be a challenging juggling act whether you earn $2,000 or $10,000 per month.
The sad reality is that many families float along month after month without a financial game plan. It’s not uncommon for high-earners to live paycheck to paycheck because they don’t have a grasp on their personal financial priorities.
And even those who make efforts to spend wisely forget to adjust their game plan when major life events (think child birth, job change, sale or purchase of a home) come along.
No matter where you fall on the financial game plan spectrum –from no plan at all to a perfectly executed one—it is critical to be sure that your overall plan aligns with your financial priorities and values.
Read on to learn how my wife and I establish and evaluate our financial priorities –and how you can do the same!
Why You Need to Define Your Financial Priorities in the First Place
Knowing your financial priorities is a key piece of a solid financial game plan. If you find yourself challenging or questioning this, there are several reasons why it is important.
Progress is hard to achieve without an understanding of your financial priorities.
Think of heading out on a vacation without knowing your destination. This might be fun for a while, but if you do it continuously you’ll end up nowhere, even if you are making decent time.
Without defined priorities, it is easy to float from one goal to another without careful thought and planning.
This may cause you to be unprepared for major financial events like college, weddings, and retirement.
If you do not have ranked financial priorities, you will most likely finding yourself multitasking with your money.
Research proves it: multitasking doesn’t work. If you’re trying to multi-task with money – pay down student loan debt, save for a new car, and remodel your kitchen all at once, for example – you’re spinning your wheels.
How to Build a List of Your Financial Priorities
When you’re ready to begin building a list of your financial priorities, you may feel overwhelmed by where to begin. I recommend two approaches that have worked for me and my wife: values-based planning the 7 Baby Steps.
Yes, these approaches are very different. But I believe they will help you determine your financial priorities and put a plan in place that will actually work for YOU!
1. Follow a Values-based Planning Approach
If you’re a regular reader of this blog, you’ve probably noticed that I frequently refer to Values.
Simply put, I define values as your personal principles or standards of what is most important to you in life. In every financial area of your life, ensuring that you make money, spend money, save money, invest money, and give money in a way that matches your values is very important.
When it comes to determining your financial values, I recommend asking yourself a few simple questions:
- What is your main reason for earning money?
- What use of your money do you feel is most fulfilling?
- How do you best contribute to your overall financial well-being?
- What kind of legacy do you wish to leave behind?
Answering these questions may not be easy, but your answers will reveal what is most important to you.
If this approach seems to make sense to you, please check out our FREE guide, The Money Values Toolkit.
2. Follow Dave Ramsey’s 7 Baby Steps
The 7 Baby Steps, as created by personal finance expert Dave Ramsey and pictured to the right, represent a ready-made plan for defining your financial priorities and translating them into an actionable game plan.
Related Reading: 7 Ways Dave Ramsey is Right About Money
When my wife and I first were married, Dave Ramsey’s teachings in The Total Money Makeover and Financial Peace Revisited helped us narrow our focus and define our financial priorities. They helped us discover that we value Dependability, Giving, Stewardship, and Order.
Translating Our Priorities into Action
After discovering our priorities, we committed to a budget, chose to live in an inexpensive rented town home instead of high-priced corporate apartments, rarely went out to eat or bought new clothes, and focused on being content with what we had.
Having a clear understanding of our financial priorities helped us to define a vision for our future. This vision led us into action to pay off a small car loan, save for a house down payment, secure term life insurance policies for each of us, and pay off my student loan debt over the course of the first six years of our marriage.
Don’t Just Discover Your Financial Priorities – ACT ON THEM!
Understanding your financial priorities is important, but acting on them is what matters most.