A common goal that folks set is to “improve my finances,” but most goal setters do not achieve this goal because it is too broad to effectively address. If someone has credit card debt, student loan debt, a mortgage with a high interest rate, no emergency fund, no retirement accounts despite their employer offering a 5% 401(k) match, no automatic transfers, no travel rewards card, no budget, and no idea what their net worth or annual spending is, it is difficult to decide what comes first to improve their finances.
Our Financial Accounts Series goes through the order that you should acquire certain accounts, but this still does not necessarily address the ideal order of financial goals generally. You need a checking account before you try to address any financial goals, but it is more difficult to determine whether you should be paying down debt or growing your net worth by maximizing contributions to a Roth IRA.
The Simple Initial Prioritization List
There is no one correct order for your financial goals, but the beginning is easier to judge. If you are starting your financial journey, these are the initial five financial goals to tick through:
Open a checking account to serve as the hub of your financial life.
Save for emergencies by setting up an emergency fund in a high-yield savings account.
Invest enough money in your HSA to get any employer match, invest enough money in your HSA to cover basic annual medical expenses, or choose a health plan that works best for you.
Invest enough money in your 401(k) or other employer account to get the employer match.
Pay off any high interest debt like credit card debt as quickly as possible.
Some of these may not apply to you if you are self-employed, do not have an employer match, or do not have any high-interest debt (yay for that one!). Check off the ones that apply to you as quickly as possible before branching out into other financial goals.
Make One Financial Change at a Time
Once you check off the five basic steps of financial wellness, your financial goals ultimately depend on your personal preference and financial situation. Some general topics, in no particular order, may include:
Paying off other debt quickly
Improving your credit score
Saving for a specific happiness spending goal
Becoming self-employed
Building generational wealth
Retiring
Investing in issues that inspire you
Identify a goal that inspires you the most and use it to continuously improve your finances, one step at a time. Overwhelming yourself with a month’s worth of financial changes in a day will most likely discourage you from the steady financial improvement required over time.
Regardless of what your initial goal is, paying attention to your finances will slowly improve your finances. I opened high-yield savings accounts, started tracking my spending, began maximizing contributions to a Roth IRA, and obtained my first credit card to build credit when I was 22 years old. Despite taking each of those steps in the months after graduating from college, I did not start regularly tracking my net worth until I was 28 years old! It took six years to get from a financially savvy young person who had a grasp of her annual spending for mid-term goals like attending rugby nationals to a late-twenty-something with the ambition to focus on building wealth to retire early.
Whatever your goals are now, they will change. Ideally, they will grow over time, and that is exciting. If you are starting with a goal that feels small, like improving your credit score so you can eventually qualify for a great mortgage rate, the process of achieving that goal will improve your financial awareness and set you up for your next goal. We are all on our own financial journeys that are simultaneously the fastest and slowest journeys we could imagine.
Comments