Managing Different Financial Priorities

How to Manage Different Financial Priorities

One of the main questions that I get from young professionals is how to prioritize multiple different goals such as paying down debt, investing for future, saving for a house or wedding and making sure your assets and lifestyle are protected. The issue of prioritization is a constant issue that everyone faces and it is often hard to juggle multiple goals with different time horizons.
One way to help alleviate these issues is to create a goal-based spending plan and create a savings strategy to tackle these goals in a more manageable way. You only have so many resources you can allocate to each goal and this is where the prioritization comes in.

Prioritization
One way of approaching it is a hierarchy of needs, making sure you are covered for the monthly expenses such as living and lifestyle expenses, taxes, etc; and then looking at your remaining excess cash flow and determining what goals would have the most drastic effect on your life if they are not met.

An example of this is if you have a sizeable line of credit from post-graduate education. While it is important to save for retirement while you are young to benefit from compound investment growth, it is significantly more important to pay down your debt as it has a much larger effect on your overall cash flow and lifestyle in the short term.

Everything in life comes down to prioritization and the same for finances. Sometimes you have to prioritize short-term goals at the expense of long term ones to achieve all of your goals.

S.M.A.R.T. Goals
When working towards a target, it is important to create SMART goals (Specific, Measurable, Attainable, Relevant and Timely). By creating a SMART goal, you are able to bring structure and tractability to your goals.

Goals will be different for everyone as no two people are the same, but the strategy used are often quite similar. One example is when you are looking to purchase a house.  It is important to contribute to your RRSPs to at least $25,000, since you are able to borrow funds through the RRSP Home Buyers Plan, and to maximize your TFSAs.

If you create a monthly savings strategy, and include it in your goal-based monthly spending plan, and then track your progress, you will be on your way reaching your house downpayment goal over time.

Out of Sight, Out of Mind
I am a huge fan of creating monthly savings strategies to pay down debt and save for large purchases. By creating a monthly strategy, you are able to chip away at these larger goals over a longer period of time, factor it into cash flow and create good financial habits.

Once you have created these habits and you have reached a specific goal such as paying for your wedding or lowering your debt to a specific level, it is important to roll the “surplus” cash flow into your next priority that took a backseat to your more immediate goal.

When there is extra cash sitting in your account, you may be tempted to spend it on an unnecessary purchase due to effect of feeling richer.  However, this behaviour would completely undermine the good financial habits that you had just developed. Considering that you were previously maintaining a standard of living that was financially attainable when you didn’t have the extra cash flow, you should direct it to your next goal and continuing to reinforce your good financial habits. 

The worst thing you can do after developing good savings habits and reaching your goal is to allow those habits to go to waste.