The Priorities of Personal Finance

A client recently let me know that she and her husband had just booked an overseas trip for later this year. I told her I was very happy to hear that and it sounded like they had their personal financial priorities in order.

The majority of people who approach me for advice are most interested in guidance as it relates to their investment portfolios. I would like to point out that there is a hierarchy of personal financial priorities, and though very important, investing for the future should be considered third of the three priorities: life, protection and investments.

Living Life Is the First Personal Finance Priority

In my career as an investment advisor, is has been most tragic to assist a couple in saving and investing for their golden years only to have one of them diagnosed with a terminal illness right at retirement. Living life within financial reason (taking care of all needs and some wants) should be the first priority in the hierarchy of personal finance. We have no guarantee of how long we will live and the current enjoyment of our lives should not be put off until retirement. (For related reading, see: Enjoy Life Now and Still Save for Later.)

Having Adequate Protection (Insurance) Is the Second Personal Finance Priority

Should we be able to afford it, having adequate health insurance for potential medical attention should be purchased. It is foolish to be focused on saving for our future without being covered by insurance for a medical emergency and then have our savings wiped out and fall into indebtedness to a medical provider. Equally concerning would be a disability or loss of life without appropriate disability or life coverage and throwing ourselves and/or family members into an impoverished lifestyle.

Fortunately, many of us work for employers that offer benefits packages allowing us to obtain health, disability and life coverage with affordable group rates even with pre-existing conditions. In most cases, benefits packages should be fully taken advantage of when working for an employer that offers them.

Having an emergency fund also falls under the priority of having adequate protection. It is important to have somewhere between three months of expenses to six months of income in a liquid savings account to cover minor emergencies like a water heater or automobile breakdown. An emergency fund could also be utilized to cover deductible gaps in insurance coverage. (For related reading, see: Why You Should Have an Emergency Fund.)

Property protection insures those things we own (home and automobile) and can’t afford to go without. An umbrella policy should be considered as a typically low-cost way to obtain significant additional liability coverage above the limits offered by property insurance policies alone.

Long-term care insurance provides coverage for assistance in living if/when we are unable to fully care for ourselves. It should be considered when affordable and when one wishes to avoid burdening family and/or friends in the future with our care.

Financial Independence Is the Third Personal Finance Priority

Once we find ourselves affording all our needs and some of our wants (life), and we have adequate protection for emergencies (protection), we can then turn our attention more toward the third priority in personal finance: saving and investing for our future with the goal of achieving financial independence (investments). Financial independence is that stage of our life where we have enough money and assets working for us and we no longer need to work. To some, this may seem like an unachievable dream, but saving for our future should not be forsaken. I believe it was Peter Lynch who said “we save for when we cannot work.” Whether financial independence appears achievable or not, you will be glad you have a nest egg of savings if you need it at some point in your future. (For related reading, see: Declare Your Own Financial Independence Day.)

If you are fortunate enough to work for an employer that offers a retirement plan (e.g. 401(k), 403(b)), you should consider taking advantage of it. Having money come out of your paycheck automatically and go straight into the retirement plan applies the “pay yourself first” rule of investing. At a minimum, take full advantage of any free money (matching) that your employer may be offering.

Be sure to visit with your employer’s human resources or benefits team periodically to discuss optimizing your available benefits. See your property insurance agent to discuss the property coverage you should be considering at a minimum. My hope is that you are in an ideal income situation, allowing you to apply at least minimal balance to all three of these personal financial priorities going forward. (For more from this author, see: Investment Grade Bonds and Your Portfolio.)