Setting Your Financial Priorities

I am always quick to make it clear that there are many voices out there with advice on how you should handle your money. Mine is one of those voices, but I always remind my students and others who choose to listen that you should always be careful and, above all, make sure you deal with licensed financial professionals.

Having said that, you will still find a variety of opinions as to how you should set your financial priorities. My advice is simple and consists of three key areas: saving, debt reduction/elimination, and investing. I put saving first on my list of priorities because failure to establish an emergency or “rainy day” fund of at least 3-6 months of your current income puts you at too much risk if, God forbid, you lose your job, are injured and can’t work, and so on. So my first priority is always to set that money aside in an interest bearing account. Granted, these days the interest on savings is at an all time low, so be sure to shop around and watch out for fees!

Debt reduction is a logical process – attack the highest interest rate credit cards first, NEVER make only the minimum payment, and be careful not to add to the problem with additional charges unless you are prepared to pay those immediately when you get your monthly statement.

An article out today from Dana Dratch at CreditCards.com offers some great advice about why some financial “rules” you may have heard might not be the best advice after all. The very first one deals with paying down your mortgage and is definitely my favorite. Some folks argue that you should pay off your mortgage as quickly as you can. Like the article, I believe that you should always consider your “opportunity cost” in considering all financial decisions. If your investment portfolio is earning a 7% return, should you use money you could add to that investment to pay down a 5% mortgage?

Some counter with “Would you borrow money at 5% and invest it in the stock market?” Of course not. But in this case you already have the mortgage, and it doesn’t make sense to sacrifice a greater return just because debt is bad.

Only you can set your financial priorities. My advice? Spend one hour with your money every week, and make sure that your financial decisions are made in line with the goals and priorities you have set. Easier said than done.

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One Response to Setting Your Financial Priorities

  1. Rey says:

    Quality contribution, cool web page design, continue the great work

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