Without a roadmap in life, it’s too easy to get off track. If you go through life making decisions without any framework, you’ll wind up with at least some outcomes that make you unhappy. If you don’t know what you want and you don’t list those goals out in order, you can’t achieve them.
Exercise 1: Take out a piece of paper. Draw a vertical line down the middle. On the left hand side, write down the priorities in your life, in order. (Family, money, spiritual beliefs, personal growth, friends, education, social change, social status, having fun…) When you’re done, move to the right hand side of the paper, and write down the order in which you are currently dedicating yourself to each one. Then draw lines connecting each item in the left column to its place in the right one. Too many criss-crossing, diagonal lines means that your life is imbalanced. Begin to rearrange your life so that no lines cross.
Exercise 2: Write down specific financial goals that you want, in the order that you want them. You probably won’t be able to have everything that money can buy (if, for example, you buy the BMW now, that’s less in your nest egg later.) Why do you work? What do you expect the money you earn to buy you – either today or decades from now? When you prioritize them, you focus on the ones you really want and relinquish your concern over the others.
Possible specific financial goals include:
Travel, pay off debt, build a nest egg, build an emergency fund, buy a luxury vehicle, save for a down payment, pay for the wedding, save for the kids’ education, or ensure your parents retire comfortably.
Write yours down.
Allocate – Now identify which ideal, from the first exercise, each financial goal is serving. Are they in line with one another? If your top priority in life is building a better life for your kids, why are you spending so much on eating out? The way that you spend your income should directly correlate with your priorities – the biggest chunk should be spent on the things that are most important. This does not mean that if “family” is most important, you should buy a $500,000 home. Doing that, in fact, is not serving “family” at all – it’s serving “social status.” So, if you say you care about your family most, don’t allocate 30% of your salary to buying a mansion. If retiring comfortably is the second most important thing, allocate more of your income to savings.
Evaluate – with each major purchase, ask yourself: is this in line with my top three priorities? Which ones is it serving? Which ones am I sacrificing? When making decisions, ensure that your top priority is being adequately met before moving on to invest in the next one. How effectively are you doing this? (A personal finance tool, like Mint.com or Bundle.com, can help with this sort of evaluation. If you’re spending 15% of your income on clothing during the year, you’re not putting into retirement. Is that in line with your priorities?)
Adapt – Your financial goals – and maybe even your priorities – won’t be static throughout your life. Maybe paying off debt is the most important thing right now, but in a few years, you’ll want to start saving for retirement. (Ideally, you’d do both at the same time, depending on the type of debt and where each falls on your list.) As life progresses, so too will the way you spend your money and the way you make decisions. Always be flexible in adjusting them so they are best serving your priorities.