Setting Your Financial Goals: A Basic Order of Operations

Setting Your Financial Goals A Basic Order of Operations

One of the biggest things I see a lot of new parents struggling with is setting financial goals. With so many new responsibilities, and so much advice about what they “need” to be doing, it’s often hard to figure out how to prioritize and what to focus on first.

  • Should I start saving for college or put more money towards retirement?
  • Is it more important to build up savings or pay down debt?
  • What kind of insurance do I need to protect my family?
  • I’d like to buy a house, but I also want to travel.
  • And how the heck am I going to afford childcare?

It’s a lot to deal with. You want to make good decisions, but with so many competing priorities it can feel confusing and overwhelming just trying to figure out how to take the first step.

The truth is that there is no “right” answer about where to start. Financial planning is a personal process, and your personal financial goals should depend on your specific situation and what you want your life to look like.

But if you’re having trouble figuring out what to do first to get your financial life on track, here’s my take on how to prioritize all of your different financial responsibilities.

An order of operations for your financial goals

We all remember our order of operations from elementary school math class. Parentheses first. Addition and subtraction last. You know the deal.

Today I want to give you a basic order of operations for your financial goals. It’s nowhere near as iron-clad as what you learned in math class, and you should feel free to make adjustments to fit your own situation, but I think it’s a pretty good start.

Here it is:

  1. Pay the minimums on all your debts
  2. Get health insurance
  3. Build a Stage 1 emergency fund
  4. Get your wills and other estate planning done
  5. Get life insurance
  6. Get disability insurance
  7. Contribute to your 401(k) up to your employer match
  8. Get liability insurance
  9. Pay down your high-interest debt
  10. Put 25% of your money towards each:
    • Build a Stage 2 emergency fund
    • Build irregular expense funds
    • Pay down low-interest debt
    • Invest for the future
  11. Choose your own adventure
    • Save for college
    • Save for a house
    • Travel
    • Start a side business
    • Really, this is where you do whatever makes you happiest

Why are these the right steps?

Okay, so there it is. The order of operations for your financial life.

By why these steps? Why in this order? What makes this right?

Well first of all, like I said above, there is no “right” answer here. But I do think this is a pretty good place to start.

Here’s the thought process at a high level:

  1. It prioritizes financial security. First and foremost you ensure that your family will have the financial resources it needs no matter what.
  2. Once that basic security is in place, you can focus on longer term goals that will help you build your financial freedom.
  3. It uses math to prioritize the things that will have the biggest payoff (e.g. getting your 401(k) match and paying off high-interest debt).

But to make it a little more concrete, here’s a quick explanation of each step.

1. Pay the minimums on all your debts

This will keep your credit report in good shape, which will make it easier and less costly to do things like buy a house, rent an apartment, get a job, and not get hassled by collection agents.

2. Get health insurance

When your child is sick, you want them to get the care they need. Here are some posts that will help you decide what health insurance to get:

3. Build a Stage 1 emergency fund

No matter how well you plan ahead, life always has a way of throwing something unexpected your way. Building up a small emergency fund of $1,000-2,000 will help you handle those unexpected expenses without throwing everything else off track.

4. Get your wills and other estate planning done

Most importantly, a will puts you in charge of who would care for your children if you were no longer around.

5. Get life insurance

Life insurance ensures that your family will have the financial resources it needs, even if they are no longer able to rely on your income (or your services if you’re a stay-at-home parent). Check out my guide to life insurance for a step-by-step breakdown of how much to get and how to buy it.

6. Get disability insurance

According to WebMD, your odds of being disabled for some period of time before you’re retired is about 1 in 3. Disability insurance will replace your income in the case that medical issues prevent you from earning as much as you do now.

Here’s a complete guide to getting the right disability insurance for your situation: Disability Insurance: The Crucial Protection You Probably Don’t Have.

7. Contribute to your 401(k) up to your employer match

With those basic protections in place, it’s time to start making some money! If your employer offers a match on your 401(k) contributions, that’s a guaranteed 50-100% return that you won’t find anywhere else.

8. Get liability insurance

Liability insurance covers you in case you accidentally injure someone else or damage their property. It’s a little further down on the list than the other types of insurance simply because you’re less likely to be sued when you haven’t accumulated much money yet.

9. Pay down your high-interest debt

Not all debt is bad. But the truth is that every day you have debt is costing you money, and the higher interest debt is costing you the most.

What counts as high-interest debt? There’s no exact answer, but I would say that debts at 8% or above would be a good place to start.

Paying extra towards an 8% debt offers a guaranteed 8% rate of return, which is just about the same as the long-term return of the stock market. And since the stock market isn’t guaranteed, those debt payments are a pretty good investment.

10. Put 25% of your money towards each:

  • Build a Stage 2 emergency fund
  • Build irregular expense funds
  • Pay down low-interest debt
  • Invest for the future

A Stage 2 emergency fund not only gives you money to handle some of life’s really negative events, but it can also help fund some of your biggest goals.

Saving ahead for irregular expenses will make it easier to stay on track towards your long-term financial goals.

Paying down your low-interest debts will give you more flexibility with your money, and therefore with your life choices.

And investing for your future will build the long-term financial resources needed to one day be financially independent.

It doesn’t have to be 25% towards each, but I think that each of these goals are just about equal in terms of importance. Mix and match however you please.

11. Choose your own adventure

If you have all of the above in place, what you do next really depends on what you want out of life. Some parents will want to put money away for their child’s education. Others will want to save for a house, travel, change jobs, start a business, or go back to school themselves.

This is where it pays to do a little self-reflection. Take some time to think about what your ideal life would look like. What do you want more of? What do you want less of? What makes you happy? What would you like to do on a daily basis?

Those answers will help you decide what to prioritize next.

Figuring out your personal financial goals will take some time. No matter what you think they are right now, they will almost definitely change as you move forward, meet new people, find new passions, and overcome new obstacles.

So the best thing you can do is start moving forward today and figure it out as you go. I hope this helps you take that first step.

By the way, part of what I do as a fee-only financial planner is help my clients figure out their goals and set their priorities. And I specialize in working with new parents just like you, so I know what you’re going through. If you think you might like some help, click here to schedule a free phone call so that you can tell me about your financial situation and what you’re struggling with.

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