Personal Finance is Personal (or, an Exercise in Stating the Obvious).
Those of you who’ve been reading since The Year of Saving Dangerously first got started might remember the somewhat fickle nature of the initial posts. For those of you who weren’t reading back then, allow me to explain: I had no idea what my priorities were. I’d write a post about paying off debt, and claim that was at the top of the list. I’d explain why an emergency fund is important, and of course that would be exactly what I was going to work towards. The week after that, saving for retirement would be my ultimate goal. Then, of course, there was the YNAB buffer that I would, of course, be working towards.
I have accomplished…some of those things. I have an IRA - it even has enough money in it now to be taken out of bonds and invested in an index fund (whatever that means). I have an emergency fund, though that was less the result of stringent saving and more the result of using a sudden burst of willpower to set aside a large lump sum (thank you, tax return). I’m less in debt, but even the majority of that relief is the result of my unpaid accounts hitting the seven-year mark and magically vanishing from my credit report. I’m still not buffered.
Hindsight is always 20/20, of course, so now that I’m unemployed I can’t help but think about all the sweet, sweet money I was making, and how I could have managed it better. My current conclusion is that the thing that really hurt me was that initial lack of focus. I wanted to save, I wanted to invest, I wanted to pay off debt, and - of course - I still wanted to spend.
The thing that I didn’t want to admit when I had money was that I probably couldn’t do it all. It’s a limitation I tend to struggle with in most areas of my life, so I probably shouldn’t be surprised to see that tendency rearing its head here. I can’t do it all, you can’t do it all, no one can do it all. You’re going to have to set financial priorities.
Some Things Should Come First, Period.
If you have debt, you need to pay it off. Forget about saving for retirement. Forget about an emergency fund. You can’t prioritize anything if you have a deficit hanging over your head. The only possible exception is student loans or a mortgage. Make paying off those credit cards, medical bills, or car loans your number one priority, because getting out of debt is going to be the thing that clears up more of your money for whatever that next priority is.
Then build up an emergency fund. Aim for three months, initially, and save as aggressively as you can. A safety net is important. That’s going to give you the security need to feel free to save for whatever your next priority is. Now, you have no debt? You have an emergency fund? Good.
Figure Out Your Priorities.
Now you can think about saving for retirement or paying off your student loans or building a bigger emergency fund (or whatever else). This is where your personal goals come into play, and you may as well figure it out right now. In a second, you’re going to close your eyes and think about what your ideal life would look like if money wasn’t a concern. Let’s be clear - this isn’t an exercise in ‘if I was a millionaire.’ Let’s forgo the private jets and champagne pool parties and mansions. Think somewhat reasonably. What does that look like? Close your eyes and think about it for a minute.
So, what did it look like? Were you relaxing in the comfort of a house you own? Were you backpacking through South America? Indulging in designer clothes? Had you quit that fantastically awful job so you could focus on your painting/music/other creative endeavor? The answer to those questions are the things that should guide how you prioritize your spending.
If you imagined material comforts, you best option might be make sure you save reasonably for retirement and emergencies, and then budget for the luxuries you enjoy. I’m not particularly an advocate or detractor of consumerism, so if stuff makes you happy then I say go for it (responsibly). If you were imagining owning a home, then you’re probably going to want to focus on building a bigger emergency fund (home repairs are expensive) and saving for a down payment. That’s a heck of a long-term goal, so cutting out the excesses and choosing to live frugally is probably the best course of action. Traveling is harder the more obligations you have, so if that’s your dream you might want to try a combination of frugality and minimalism - sell the stuff you don’t need for extra cash, and avoid accumulating more. Then save, save, save. Did you dream of quitting your job and focusing on your passions? You might want to do a little research on the intense road to financial independence. There’s a whole subset of the population living extremely frugally, saving and investing wisely, and retiring earlier than you might believe is possible.
I Love to State the Obvious.
You might be rolling your eyes and thinking that focusing on your goals is sort of an obvious thing to do. I don’t entirely disagree. I simply think that it’s easy to lose focus on some of those goals when you have recommendations from all directions telling you what your focus should be. Maybe for you, maxing out your retirement savings every year so that you can retire comfortably at 55 isn’t the best way to live the life you want to live. I also think that it’s easy to start the process of getting your finances in order without a clear idea of what is going to come after paying down debt and building up some savings. If you’re using You Need a Budget, figuring out when to prioritize that buffer might feel tricky. Mostly, I guess I’m just trying to reiterate that your budget is meant to work for you, and your unique individual goals, and there’s no reason to feel like you have to focus on everything all once, or follow someone else’s prescription for a happy life.
