When you’re planning out your financial year, after budgeting for the bills and everyday expenses, you have to start thinking about everything else. Are you planning a vacation this year? Have debt to pay off? Want to buy a new car? Know you’re going to have some big home repairs? Or are you just struggling to get caught up? And what about those longer-term goals like buying a house, saving for retirement and yours kids’ college funds? How on earth do you find enough money to do them all?!
This has always been our struggle, I see all these things and feel like the clock is ticking fast on our time to do some of them, but there just aren’t enough dollars to stretch to saving for them all at once. Just like you make the most of your time by prioritizing your daily tasks with a to-do list, you have to prioritize your money and spending, too.
So where do you start?
Dave Ramsey calls this your four-walls. You pay for food for your belly, the roof over your head (and utilities), your transportation and your basic clothing. These are your necessities. These come first no matter what.
This is all your other bills and basic needs. Your minimum payments on open debts, and anything you pay monthly that didn’t fall in one of the above categories, but isn’t a luxury (expensive cable plan, for example).
Catch up anything that’s behind. If you’re behind on your rent/mortgage, utilities, or debt payments, get them caught up with anything that’s left over. I felt like we were stuck with every extra penny going here for years. Well, really, we were. It was a never ending cycle. If that sounds familiar, you either have too many luxuries in Priority Two or you have what I call an income-problem. You’ll need to solve either of those before you put any money into the next level.
Short-term savings funds and emergency funds. I find that these two really need to be on the same level or you’ll find not having one eats into the other. Start putting a little aside for emergencies and another little stash for clothing, medical, annual pet care, gifts, what have you. Those little things that are easily forgotten until Oh my gosh, they’re due! It’s easy to flip back though the last year of bank statements and see when and how much these were so you can ballpark how much you want to set aside. Keep your emergency small but healthy at this point. $500-$2000 depending on the size of your family, deductibles, and security gland.
Once you’ve got 1-4 handled and still see some money leftover in your budget, it’s time to start really tackling those debts. They are costing you money, causing you stress and simply need to go. Buckle down and find every extra penny and pay those suckers off. It doesn’t really matter what method you choose, go by balance, go by interest rate, whatever, just get them done.
Words of wisdom, don’t try to do priorities 5-8 all at once. Just like with your time, multi-tasking slows you down where focus allows you to knock them out at a much faster pace.
Go for a larger emergency fund. Most people pick 3-6 months worth of their basic budget so that there is a cushion for any unexpected job loss. Go with whatever amount makes you comfortable, but be sure to set a reasonable stopping point so you can move forward. This is a good place to press pause and save for a downpayment for your first home if you’re not already a homeowner!
Save for retirement. Now is the time to max out your contributions for your retirement funds. And yes, this comes before your kids’ college funds. There are other ways to pay for college, retirement, not so much.
I like to call this advanced savings goals. This is kids’ college funds, paying off the house, buying a vacation home, remodels, whatever you want to do with your remaining funds because you’re debt free, have a comfortable cushion and have planned for your future. By the way, I highly recommend that paying off the house one comes first. Just saying’.
Now, some of you might be wondering, what about those little things that kind of put a
halt to these big financial goals?
Storm Clouds and Stork Funds.
These things happen, they come along and put a halt to your rolling financial goals. Layoffs on the horizon, unexpected medical issues, big life changes like a move — these are storm clouds. You often see them forming on the horizon, but it’s not uncommon for them to hit out of nowhere. Stork Funds are the flip side of becoming pregnant (or your other half doing so) or adopting, those are just too happy to call storm clouds! When these situations occur, you go back to Priority Four and you build that savings way way way up. Every extra penny goes there. It gives you a buffer against the storms. If you need it as a flotation device, you’ve got it, if you come out pretty good on the other side, you throw all the extra above your original funds at whichever other Priority you’ve reset to.
We’re in one of these right now. We know we will be moving this summer, so we’re back to minimums on debts except for some key ones that directly impact our moving opportunities. Every other penny goes into the moving fund which will pay for labor to help moving, moving supplies, deposits, and all the other little things that come with that life change. Whatever is left afterward will go straight back to paying off debt.
I hope this gives you a bit of a roadmap on deciding where your money should go. Join us next week over at ErinBrans.com where Erin will be talking about how she feeds her family of five on $400 per month! And don’t forget, you can join us over in the Simplify Money Facebook Group for daily accountability!