Barring the billionaires amongst you (!) we all have limited financial resources which means making choices as to how we spend our earnings each month. Working out what our priorities should be is not always easy. Of course, survival dictates that we cover our basic living costs such as accommodation, food and bills first but what should come next?
Here’s an easy guide to determining your financial priorities.
1. Pay off your debts
Debt costs you money so the ideal state is to live within your means and only buy what you can afford. Not all debt is equal though. A mortgage, which allows you to purchase an asset which should rise in value with at a tolerable rate of interest, is good debt. Credit card and store card debt, however, has high interest and is often used to buy luxuries which you could easily live without. This interest will more than cancel out any interest you earn on savings, especially right now when rates are extremely low, so funnel any extra cash you have into zeroing high-interest debts and prioritise this above saving.
2. Accumulate an emergency fund
The most recent economic wellbeing report from the US Federal Reserve revealed that four in ten Americans would borrow or sell something to cover an unexpected $400 expense or would not be able to pay at all. That is a shockingly high proportion of people who don’t have $400 saved up in a bank account ready for emergencies. If you are one of those people, an emergency fund needs to be a priority.
Once debts are paid off accumulating a buffer of cash to use in unforeseen circumstances is the next target to aim for. And don’t limit yourself to $400. We usually recommend six months’ worth of living expenses set aside in a secure but easily accessible bank account in case you are sideswiped by a really serious emergency like not being able to work for an extended period.
3. Life insurance
Over two thirds of the UK adult population don’t have life insurance according to the 2019 Lifesearch Health, Wealth and Happiness report, a fact the report describes as ‘illogical – and deeply problematic.’
We concur! Households with no life insurance are extremely vulnerable in the event of the untimely death of a breadwinner. If you have a partner or children who depend on your income, life insurance replaces that income should you die and should be high on your list of financial priorities. Indeed, it is one of the cornerstones of financial planning. If you need further information on life insurance, take a look at this blog post by Infinity financial consultant, Joseph Regan.
4. Retirement fund
How are you going to cover your basic living costs when you retire? State pensions have been shrinking for years and there are many who believe their days are numbered. Even today, it is already an uphill battle to survive on a state pension and governments are increasingly shifting the responsibility for funding retirement to individuals. Which means that you need to take control of your own retirement and start saving as soon as possible. There are a wealth of pension saving options out there so take professional advice on the best way for you to build your nest egg with minimum risk.
One final word of warning: if you have to choose between funding your children’s education or your retirement fund, prioritise the latter. It is relatively easy for young people to borrow money to study but no bank will lend you money to retire.
For help with any of the above, why not contact one of our advisers who would be happy to offer you a free no-obligation consultation to help you get your financial priorities straight.