Most people have a limited income with unlimited ways to spend that income. There are so many current and possible expenditures that pull at us; it is often hard to know which should be our priorities. Let’s take a look at what your options are and which could and possibly should be the most important.
- Current living expenses include necessities such as food, shelter, warmth, and transportation. It is really important that you live within your means. I can’t stress this enough. If you have more money going out than coming in, then you need to take a hard look at your lifestyle and make some choices. Some changes in behavior may be called for. Or you need to look at a new job or career that will help you to get ahead of expenses. Your advisor should talk to you about this in a non-judgmental supportive way and help you to determine just what is and what is not a necessity.
- Protecting what you have already built for yourself is the financial foundation on which everything else is built. Life insurance protects both your family and the estate you have already built. Disability insurance protects your ability to earn, and Critical Illness insurance helps you in whatever way you need it after a medical diagnosis. How long could you keep the assets you now have if you didn’t have a paycheque every week?
- Debt repayment – Paying down personal debt is a good strategy depending on how much debt you have, what the interest rate on the debt is, and whether it is tax deductible debt or not. The best strategy is to know what your net income is compared to your monthly expenses, and ensuring you do not accumulate debt in the first place (this is excluding a mortgage or debt on other appreciating assets). If your debt payments exclude you from saving anything, then you are likely living above your means (see item #1).
- Children – Yes, these wonderful additions to our lives are expensive. Saving for their future education, no matter how little you can afford each month is recommended. The federal government still kicks in 20% of each deposit (to a maximum of $2500 a year). If you can’t find the money for these then don’t be shy about suggesting that friends and relations forego some gifts and help out. If you are a grandparent, this can be a big help to your grandchildren’s futures.
- Savings – I am listing this last, but it is by no means the least important. Savings can be segmented into short term (emergency funds), medium term (saving for a major expense such as a renovation, trip or car purchase for example), and long term (retirement saving). Saving should be one of your non-negotiable monthly expenses just like your mortgage payment or hydro bill. Waiting until you have extra funds or putting it off to some future date to start saving will ensure you never reach that goal of financial independence.
And a word of caution—don’t forego your other financial goals to do everything for your kids. It’s ok to say NO sometimes. It is highly unlikely that they will support you in your retirement, and remember that they have their entire lives to earn and build their own wealth.
Keep in mind that everyone’s circumstances and goals are different. The priority of one family may be quite different from another family. Your financial advisor should be able to help you prioritize each of these goals and set a plan in place to tackle each one.