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Posted February 8, 2010

Prioritize (Don't Juggle) Your Finances

By FPA member Marina Goodman, CFP®

Regardless of your age and family circumstances, deciding between your financial goals can be a challenge. Should you save for retirement or pay down your credit card? Should you save for college or take the kids to Disney World? Instead of trying to juggle all your goals, prioritize them first and tackle them in order of importance.

1. Set up a budget. Compare income and expenses — so you know what you have to work with and can set priorities. Your budget is your most powerful tool in making decisions.
2. Build an emergency fund. Establish an emergency fund that would cover several months of your fixed living expenses. If you lose your job, you don't want to start running up credit card debt and paying high interest rates. That could get your finances into a negative destructive cycle that's difficult to emerge from. If you can't save that much, at least try to have one month's worth of expenses, to address emergencies such as a leaky roof, a computer meltdown or your transmission imploding.
3. Set up a home equity line of credit. This is a great extra safety "layer" on top of your emergency fund. For instance, if you do have to tap your line of credit to fix the roof, at least it's at a lower interest rate than a typical credit card, plus it might be tax-deductible.
4. Get the right kind of insurance. Disability insurance is crucial if you're a wage earner, and so is life insurance if you have people who depend on you to take care of them (financially or otherwise). Term life insurance is relatively inexpensive and appropriate for most people.
5. Pay down high-interest consumer debt. This includes credit cards, high-interest school loans or anything with a variable or high interest rate. It can be better to pay off such loans even if you have to dip into savings to do so.  
6. Part of any good savings program is staying out of debt. If you want to buy a house or a car, save first and put as much money down as you can. The more you put down, the less interest you'll pay over the years.
7. Invest early. Many young people think that because they're young, and perhaps have their eye on a nice new car or condo, that retirement isn't a priority. The best time to invest is when you're young. If you make it an automatic deduction from your paycheck, you won't have to think about it. And investing in a retirement account like a 401(k) plan or Individual Retirement Account (IRA) means your savings will grow tax-deferred for many years.  
8. If you didn't invest early, start now. If you've never managed to save for retirement, just because you're 40 or 50 doesn't mean it's too late — you still have as many as 20 years of working life left to save. The closer you are to retirement, the more you should put away for the future.
9. Once your house is in order, start saving for college. Once you're financially secure and are saving adequately for your own retirement, you can start saving for your children's education. That way, when college comes, you won't have to adjust your lifestyle as much to pay the bills. And, you won't be loading your children up with thousands in student loans. Don't make the children's education a higher priority than your own retirement. They can use loans to pay for education; you can't do the same for your retirement.
10. Have fun. Going on a family vacation and splurging can add spice to your life. But if this becomes your life, you can ruin your financial situation. As long as you're not getting into debt and derailing your plans, go on that vacation and splurge now and then!

Getting financially organized will provide a framework to live by, and cut down on stress and disagreements between spouses. A financial planner can help you put your financial picture together. 

It seems like a lot to think about. But if you do this now and get whatever professional help you need, you can put yourself on automatic pilot and ensure your financial well-being.

Find a financial planner who can help you prioritize your finances.

FPA member Marina Goodman, CFP®, is an analyst at Brinton Eaton, a boutique wealth advisory firm in Madison, N.J.

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