What Should Your Financial Priorities Be?

Barring the billionaires amongst you (!), we all have limited financial resources, which means making choices as to how we spend our earnings each month. Working out what our priorities should be is not always easy. Of course, survival dictates that we cover our basic living costs such as accommodation, food and bills first but what should come next?

Here’s an easy guide to determining your financial priorities.

1. Pay Off Your Debts

Debt costs you money, so the ideal state is to live within your means and only buy what you can afford. Not all debt is equal, though. For example, a mortgage, which allows you to purchase an asset which should rise in value at a tolerable rate of interest, is good debt. Credit card and store card debt, however, has high interest and is often used to buy luxuries which you could easily live without. This interest will more than cancel out any interest you earn on savings, especially right now when rates are extremely low, so funnel any extra cash you have into zeroing high-interest debts and prioritise this above saving.

2. Accumulate an Emergency Fund

The most recent economic well-being report from the US Federal Reserve revealed that four in ten Americans would borrow or sell something to cover an unexpected $400 expense or would not be able to pay at all instead of having an emergency fund. That is a shockingly high proportion of people who don’t have $400 saved up in a checking account ready for emergencies. If you are one of those people, an emergency fund must be prioritised.

Once debts are paid off, accumulating an emergency fund as a buffer of cash for unforeseen circumstances is the next target to aim for. And don’t limit yourself to $400. We usually recommend six months’ worth of living expenses set aside in a secure but easily accessible bank account in case you are sideswiped by a really serious emergency like not being able to work for an extended period.

3. Insurance

Insurance is a crucial financial priority that must be included in any diligent financial plan. Although not being nearly as eventful as fulfilling your financial obligations regarding unpaid credit card debt or investing in something as exciting as the stock market, insurance could potentially save money to a great extent when unfortunate events cross your path.

Similar to emergency funds, opting for the right coverage can save you and your family more money and stress than you could imagine.

Life Insurance

Over two-thirds of the UK adult population don’t have life insurance, according to the 2019 Lifesearch Health, Wealth and Happiness report, a fact the report describes as ‘illogical – and deeply problematic.’

We concur! Households with no life insurance are extremely vulnerable in the event of the untimely death of a breadwinner. If you have a partner or children who depend on your income, life insurance replaces that income should you die and should be high on your list of financial priorities. Indeed, it is one of the cornerstones of financial planning. If you need further information on life insurance, take a look at this blog post by Infinity financial consultant Joseph Regan.

There are so many ways to talk yourself out of spending money on life insurance, but the relief it can provide for your family is significant. Moreover, such an insurance policy could act as a financial cushion for paying off high-interest debt when you pass, leaving your family with enough money to cover a few months’ worth of expenses in their time of mourning.

Even if you don’t have any dependents, you will still be helping your loved ones pay burial- and funeral-related costs without having to generate debt to cover the expenses.

You can sometimes obtain a relatively inexpensive life insurance policy in your employment contract, but the coverage may be limited. Moreover, if, for whatever reason, you lose your job before tragedy strikes, your insurance coverage will no longer be valid. Therefore, it is worth opting for a personal insurance policy despite additionally receiving coverage from your employer.

Health Insurance

A health insurance policy is bound to be useful at some point in your life. You will likely be able to obtain such a policy from your employer or from your government’s healthcare marketplace.

Disability Insurance

When someone loses their ability to work and receive an income for a long period of time, the implications may be detrimental. When you can’t receive an income, expenses may start piling up, and you will end up draining your savings account just to get by. Fortunately, disability insurance provides relief for such situations on a long- or short-term basis.

If you have a substantial emergency fund, short-term disability coverage may not be necessary, but long-term disability insurance often pays out several months after the occurrence of an accident, so it is crucial to have both long-term financial coverage as well as an emergency fund robust enough to bring you through the initial months.

Auto Insurance

If you are a car owner, it is essential to have sufficient car insurance coverage to avoid having to dip into your savings account when an unfortunate event occurs. Even something as small as an unexpected car repair can significantly impact your finances if the proper planning is not put in place.

4. Retirement Savings

How are you going to cover your basic living costs when you retire? State pensions have been shrinking for years, and there are many who believe their days are numbered. Even today, it is already an uphill battle to survive on a state pension, and governments are increasingly shifting the responsibility for funding retirement to individuals, which means that you need to take control of your own retirement planning and start saving as soon as possible. There are a wealth of pension saving options out there, so take professional advice from financial experts to accumulate accurate information on the best way for you to build your nest egg with minimum risk, based on your individual circumstances.

One final word of warning: if you have to choose between funding your children’s education or your retirement fund, prioritise the latter. It is relatively easy for young people to borrow money to study, but no bank will lend you money to retire, and having a sufficient financial cushion for your retirement years should be your primary financial goal.

Most people who have a retirement plan that an employer sponsors will have a percentage of their salary paid into their retirement savings monthly. An employer will typically match around 3 to 7% of your salary. If you contribute enough money to get your full employer match, you will receive a 100% guaranteed return on your investment. This is the most important step you will have to take to fund your retirement savings.

5. Invest in Other Financial Goals

You may have many other short- or long-term financial goals beyond the financial priorities mentioned above. If you have extra money after covering the most important financial priorities, you could spend money on investments that may secure your future financial health.

It is important to set measurable goals for yourself to be able to thoroughly monitor your personal finance performance and build a solid foundation for financial sustainability. In order to reach your financial goals, you will have to tailor your spending habits and living expenses and set up a diligent budget to continuously satisfy your financial priorities while having enough extra money for investments.

You could also simply invest without having any particular goal in mind, but rather just supplementing your income with an additional source to be able to fund your retirement better and reach your financial goals. When exploring different potential investments, be sure to take your risk tolerance and the interest rate into consideration.

For help with any of the above, why not contact one of our advisers who would be happy to offer you a free no-obligation consultation to help you get your financial priorities straight.