Continuing exploring the four financial pitfalls, today let’s talk about lack of prioritization and
what the impact of that can be.
Last time we explored how financial disorganization is prevalent and a relic of the past. As a
reminder, some key takeaways to tackle disorganization are… having clearly stated goals, follow a time horizon, consider insurances to protect your income, plan for future taxes, paying your self first, and make the right investment decisions.
When we are financially disorganized, it sometimes leads to the second pitfall Lack of Prioritization. Often when our finances are, for a lack of a better term, all over the place we tend to do things out of order. Think about that for a moment. How important is it to do things in the right order?
Socks first, then shoes are a simple example. But what about something more significant? If I get sick and need a doctor to operate on me, you better believe that I’d want him to do things in the right order. I don’t want him to skip steps, cut corners, or take the advice one of his friends told him (since it worked for them). – It’s important to do things in the right order.
Let’s take a financial example. Traditional thinking may be to finish college, get a job, and then
make double or triple payments on student loans. Society has taught us that debt is evil and we need to be debt free as soon as possible. But I disagree. Sure, there is good debt and bad debt, but let’s take the student loan example. If that student loan has an interest at say 4-6% and extra cashflow is being used pay that off quicker, what is the trade off? That person may pay off their student loans in 5,6,7,8 years but at what cost? That cost is to delay ideal savings, investing in the stock market, and putting dollars to work to protect your income.
Consider this. Say someone makes aggressive payments on their student loans and 4 years into
work something unexpected happens. An illness. A car accident. A pandemic that shuts their job down for 7 months. They cannot go back to the student loan company and say… “Hey, excuse me. I have been overpaying the last 3 years can I get some of that money refunded back, something came up”. Once you make that payment it is off your balance sheet forever.
Psychologically it might feel better to get rid of those loans as soon as possible, but its not
always the best financial decision. Now, this is the part of the program where I tend to say ‘everyone’s situation is unique and this isn’t a recommendation’ but it’s something to consider.
What are the right steps to prioritize our finances? We will absolutely dive deeper on these four in
the coming months but, in my opinion, here is a short overview of how we should prioritize them.
1) Protection first
Allocate resources to protection buckets, employee benefits, and insurances. If something happens and you were to get sick and unable to work for 3 years how would the rent, utilities, and groceries get paid?
2) Become a world class saver
According to the U.S. Bureau of Economic Analysis, the average American saves around 6% of their income. A world class saver puts away 15-20% of their income into wealth building buckets.
3) Build Liquidity and save in the right places
Where to most people save? A retirement account and a bank account. The retirement account
grows well over time, but you can’t typically access it. The savings account pays barely any interest, but you have access to it at any time. Where are the other places we can save and get our money working for us?
4) Live Debt Free
Again, there is good debt and bad debt. Let’s not ignore the high interest rate credit cards, but
maybe… just maybe, we make minimum payments on student loans and mortgages for a few years while we build up our savings in other places? Remember that financial literacy doesn’t always come natural, and it rarely is taught – which is why the most important takeaway is always continue to learn.