The wealth you’re building as a young professional likely mirrors the growing complexity in your life. As additional income comes in, you’re having to balance it with a growing list of concerns, passions, and goals.
While surveys find that paying down debt is the most common goal those trying to take control of their finances have, a close second is committing more funds to invest. Building an emergency fund, saving for retirement, and buying a home often follow.
How does one balance all these goals? It’s a question many people ask, particularly as their wealth grows.
It’s important to determine one’s financial priorities consciously, and to establish a plan that’s strong enough to succeed, yet flexible enough to adapt.
Identifying your most important financial goals
Your wants and personal values determine your most important financial goals. Working with a financial advisor can help you identify them if you’re struggling to pinpoint the ones most important to you. You may have some goals that take priority, like saving for your child’s education. Others might be important passions. If you want to travel more, you should incorporate that into your planning. Balancing obligatory goals with your passions requires building a plan. If you have a desire to buy a boat, identify ways to incorporate it into your plan in addition to saving for your child’s education, retirement, and other pressing responsibilities.
There are some best practices to ensure that your growing financial security continues, no matter what comes down the pike.
When you’re trying to identify your different financial goals, also consider your opportunity cost. For instance, if you want to balance putting money aside for your three-year-old child’s college and saving up for a dream car, then you face a time constraint with your kid’s education. By placing money in an account that can grow for education today, you can ensure it grows to the size you need in 15 years. Putting everything towards the car now, you lose the opportunity to invest it for the education. This could result in paying far more for the college education since you haven’t given your money time to grow by investing it.
Balancing financial goals will depend on how much you owe in debt, your other goals, and the timeframe to achieve them. Another way to balance these competing needs is by setting strong goals. You can use “SMART” goals to reach them:
- Specific – Knowing what mark equals success allows you to plan.
- Measurable – Keeping track of whether you’re close to your goal will provide you clarity.
- Attainable – Having goals (even stretch goals) you can obtain will keep you on track.
- Relevant – Focusing on what you need or want, and not some other purpose, helps motivation.
- Time-Bound – Putting a timeframe on the goals will ensure immediacy.
An example of a SMART goal might be something like, “I would like to increase my retirement savings by $100,000 within the next three years.” This provides a very specific mark that can be measured and it’s set against a specific timeframe: three years. Assuming the income allows for that level of savings, then it’s also attainable. It’s relevant as long as it helps you retire by the age you have in mind.
This goal-setting strategy can help you keep on your path to success, while also managing multiple wants. By having a clear idea of the timeframe and specificity of the goal, you can know when you expect to achieve them, even with other competing needs.
Making smart financial decisions
Your goals may require a balance of paying off debt and adding to savings. For instance, if you have student loans, then you will need to weigh the need to pay off the loan and the desire to save for the future. This balance gets even more complicated when there are multiple debts to pay off.
One of the key factors in deciding which goal to address first is the associated interest rate. If you pay or earn more because of higher rates, then you want to address the expense or invest in the item first, if possible, before moving onto other goals.
Say you have a student loan and a high-interest credit card balance. You should certainly pay the minimum on both loans but paying off the high-interest loan first will reduce the total cost.
Another tactic for this is paying off the lowest balance first. For example, say you have two credit card balances—one for $2,500 and another for $5,000—along with a student loan of $33,000. While the $2,500 might have a lower interest rate than the $5,000 debt, some people find it easier to commit to paying down debt by paying off the lower balance first. Then you can move what you were paying towards the lower balance to the higher credit card debt. Over the long term, you will pay more in interest using this strategy, but if it helps you achieve your goal, then it’s worth it.
Weighing these debts with long-term savings requires more balance. Since you don’t want to lose out on compounding interest, saving for the long term today matters. Balancing it with your debt requires understanding how much you need to save long term to reach your goals. You can use a retirement calculator or your financial advisor to help you find that number. Then you can put the extra money you have towards the debt, which allows you to manage both goals.
Also, take advantage of perks that might help you reach certain goals. If your employer provides a company match, for example, funding enough to reach it in your retirement account will help address the goal while sapping less of your own funds.
Changing financial priorities
While setting short-term and long-term goals, ensure your financial plan has flexibility to shift as life goes on–things can change just as fast as life’s little surprises. Making sure you can adjust goals, depending on the wants and needs of your changing life, will help you achieve what will truly make you happy and financially prepare you to live the life you envision.
The good news? Once you have a plan in place, when shifts or surprises arise, it often only requires shifting the funding that you have at your disposal to the new goals and away from less important things.
With a plan in place, the new goal may not require an overhaul of your strategy. Even then, you will likely want to speak with your financial advisor to make sure whatever shift you make to the plan, it will allow you to reach all the goals you have.
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