Setting financial priorities is essential. Like most things in life, you can’t have everything, so you have to make choices about what you want to do with your money.
Pay down your debt? Save for retirement? Go on a big trip?
These options are all about goals—the important things that you’re trying to achieve. Your goal-setting is based on your priorities—placing some things higher than others according to what’s most important to you. Making those choices is based on many things, including your values, which were discussed in the first chapter.
Being aware of your goals and priorities can help you follow your plan. If you really value the ability to retire early, and you’ve made it a priority, your goal might be to put aside a certain amount toward your retirement savings. If the goal is clearly articulated, important to you, and doable, it will be easier to follow through on that behavior when you’re tempted to spend that money on something else.But how do you set your financial goals? And how do you deal with competing priorities? That is the key to smart financial planning.
A basic financial plan addresses topics of saving, insuring, investing, and tax- and debt-management. Each one is instrumental to your overall financial plan so you need to find a way to balance these priorities to make your plan as strong as it can be.
For example, a common question we hear from clients is whether to pay off a mortgage or save for retirement. Both have great impacts on a financial plan. But for each household, the answer is different; it depends on your unique situation and goals, and needs to be considered carefully. Another common example of balancing priorities occurs at tax time. People can choose to reduce the amount of income tax they pay by contributing more to their Registered Retirement Savings Plan (RRSP), which has the added advantage of helping to grow retirement savings as much as possible. It requires diligence to put money aside for RRSPs. For most people, the answer is somewhere in between; setting aside at least some money for the RRSP to reap the benefits of reduced taxes in that year.
Goals and priorities can often change over time. When you’re younger, you may be more focused on buying a home or providing for your family’s education. As you approach retirement, you may prioritize a more comfortable lifestyle, which may lead you to delay the date you stop working or to defer your government benefits to bolster your retirement income later.
Setting financial priorities and determining your goals is challenging. You have to ask yourself some tough questions, and be prepared for some honest answers. But when you do, you’ll have a better sense of what’s really important to you, and what you’re willing to do to achieve it.