I want a new car. A sleek, clean, energy-efficient wonder. But I’m not letting myself buy one – yet. Why? I have financial goals that are more important – more pressing – than my desire to ride in style.
A few things must happen within a person’s psyche before they will give up immediate wants for long-term needs. I detail them below:
1. Vision of the future.
People must be able to appropriately calculate where they were to end up if they stayed on the same old financial path. If they continued in their misbehavior: not saving, not investing, not dumping debt . . . where would they end up? More importantly, if they ask themselves where they want to be in the future, this might conjure up images what it would be like to be financially secure. How does one get to that point?
2. Getting mad, zealous, and passionate
Change only happens after a vision is realized and people get intense about accomplishing their long-term goals. This isn’t a passive attitude – hoping that everything will turn out alright in the end. This is a proactive attitude, something that compels a person to achieve unparalleled success.
3. Action in the midst of opposition
Having a vision and being passionate is not enough. In the end, it’s the things people get done that truly matter. Actually putting a game plan together and acting on it will accomplish much more than simply dreaming. They must do something.
Perhaps you’ve found your vision for the future. You want to retire wealthy. You’re zealous about achieving your goal, and you’ve even put some steps into action. Great! Now comes one of the most difficult questions: how do you prioritize your financial goals? What is the correct order of actions to get you where you want to be?
Breaking Down How Two Giants Prioritize
Let’s start with Dave’s baby steps. Here they are listed below:
- Step 1: Save up $1,000 to start your emergency fund.
- Step 2: Pay off all non-mortgage debt using the debt snowball.
- Step 3: Save up 3 to 6 months of expenses to complete your emergency fund.
- Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement accounts.
- Step 5: Work on college funding for children.
- Step 6: Pay off your mortgage early.
- Step 7: Build wealth and give!
Let’s simplify this down to the basics:
- Step 1: Save some.
- Step 2: Eliminate smaller debts.
- Step 3: Save more.
- Step 4: Invest long-term.
- Step 5: Invest in education.
- Step 6: Eliminate larger debts.
- Step 7: Invest short-term (5 years or more) to long-term and give.
There seems to be a balance between saving, eliminating debt, investing, and giving. Let’s take a look at Crown’s Money Map:
- Destination 1: Budget and save $1,000 for emergencies.
- Destination 2: Pay off credit cards and increase savings to one month’s living expenses.
- Destination 3: Pay off all consumer debt except home mortgage and increase savings to three month’s living expenses.
- Destination 4: Begin saving for major purchases, retirement, children’s education, and starting your own business (if desired).
- Destination 5: Buy affordable home, begin prepaying home mortgage, begin investing wisely.
- Destination 6: Home mortgage paid off, children’s education funded, confirm estate plan is in order.
- Final Destination: Retirement is funded, free to be more generous with time and money.
Let’s also simplify these destinations down to the basics:
- Destination 1: Plan and save some.
- Destination 2: Eliminate some debt and save some more.
- Destination 3: Eliminate more debt and save even more.
- Destination 4: Save for present goals and future goals.
- Destination 5: Buy home, start eliminating larger debts, and begin investing.
- Destination 6: Eliminate larger debts, ensure investment in education is complete, confirm estate plans.
- Final Destination: Ensure retirement is set, give like never before.
See the pattern here? Both methodologies start with small goals and move toward larger goals. In other words, they start with the foundational areas of finance and move toward more complex tasks. It’s obvious that both agree people should only splurge on large purchases after all non-mortgage debt is paid off and the emergency fund is built.
That’s why the car can wait. I want to build a firm foundation before purchasing discretionary items.
How about you? What major financial goals do you have that you’re wondering how to prioritize? Let us know in the comments below!
Photo by The Tattered Coat