It’s taxing to keep a tab of the loans, credit card bills, and utility bills to pay these off timely and avoid incurring any additional charges.
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Should I start with clearing the debts or with depositing money for emergencies? Should I buy a car or put some money for my retirement? With so many financial goals, it could be really hard to know which one to fulfill first. Well, not to worry as here a few tips that can help you prioritize your goals:
When it comes to prioritizing financial goals, most people realize that they haven’t articulated them all in the first place. So, the first thing to do before ranking your goals is to list them. List all the goals that strike your mind even for once. It could be anything like charity, buying a car, starting a business, planning vacations or a wedding and so on. List them all in one place; do not miss any.
Once you have listed all your goals, it’s time that you define them clearly. By defining your goals we mean to define the size and scale of the goal. For instance, if you have listed one of your goals as ‘buy a car’, answer a few questions such as:
Since answering these questions with exact details could be hard, an approach with estimation may work as you can always adjust your goals later on.
After defining the size, scale, and time horizon of your financial goals, it’s time to rank each of them as per their importance. Here’s a loose framework that can get you help to start with:
However, it should be noted that the exact precedence is highly dependent on your own circumstances and preferences. You may also use some online tools for designating priorities.
The fourth step is to calculate how much money you will need to reach each goal. It can be estimated by considering a few points such as, the money you have already saved up, the time up to which the goal can be held and the expected growth rate of your investment. Although, these will be just the estimates, considering these points is extremely important from the planning perspective.
Now when you have done steps 1 to 4 you have a list of goals with an estimated budget for each. Based on your budget, it is quite possible that the precedence of your goals changes. This can be explained as follows:
Let’s say you have two financial goals – one is doing charity and the other one is the makeover of your house. You ranked the makeover as first and charity as the second. But, you figured out that makeover requires more budget than charity and you don’t have that much right now. So, you may simply switch their ranks so that both goals can be fulfilled. However, if your goal is extremely important with an inflexible timeline, it is advisable to save a bit more rather than shifting the precedence.
Putting them all together
Prioritizing your financial goals is a critical step involved in developing a personalized financial plan. So, now when you know how to prioritize your goals, it’s time you set priorities right now; it’s as easy as 1, 2, 3. Just start with the listing of the goals with every single detail and then allocate budget to each of them. Keep the importance, time horizon, and budget of each in mind and rank them accordingly.
So, when are you starting with the process of prioritization of financial goals?