Your Investing Life: Balancing multiple financial demands
July 22, 2014
Whether juggling the financial needs of your parents and kids or figuring out how to save for your future while paying down debt, you probably have a lot of demands on your money. Balancing multiple goals can be challenging, so here are a few suggestions to help you maintain your financial equilibrium.
Create a list of all your financial demands and goals
If your list of financial obligations and goals are stored in your memory, transfer that list to paper (or a mobile device) so that you can see exactly what you're dealing with.
Plot out your priorities
Once you've made your list, you may also find it useful to sort your financial demands into these categories:
|Important and immediate||Rent/Mortgage, car payment, credit card debt|
|Important but longer term||Down payment on a home, education fund for a child, safety net for a parent or elderly family member, retirement|
|Nice to have||Vacations, gifts for family members' or friends' milestones|
"Rather than trying to accomplish all your goals at once, focus your energy and resources on attaining two or three at a time," said Chuck Riley, a financial planner with Vanguard Advice Services.
"The number depends on your situation. For example, while you're trying to build up your emergency fund or save for a down payment on a home, you might pull back retirement plan contributions from the recommended 12%–15%. Still, save enough to get the free money from your company match if one's available," he said.
(For help developing a financial plan, consider working with one of our Certified Financial Planner™ professionals; there may be a fee for this service.)
Cut down on the conflicts where you can
It may not be possible to eliminate all of your competing financial demands. But now that you've got your list together, look to see which obligations you can clear out with some careful planning. Starting small—turning off your landline if you mostly use your mobile device or reducing premium cable subscriptions—is a quick and easy way to reduce the number of pulls on your cash.
Another area that may be ripe for reduction is your debt, both in the amount you owe and the number of accounts you have. Debt is a useful tool but "not all debt is created equal," as Mary Ryan, a financial planner with Vanguard Asset Management Services™, points out. She classifies loans for big-ticket purchases, such as your home, car, and education, as "good debt."
Credit card debt can be more of a mixed bag. These cards can help you build your credit rating, are convenient, and may offer some enticing rewards. But they can weigh on your financial resources if you have too many or if your balances expand more quickly that your income. And the more accounts you have, the greater your risk of falling behind on payments.
"If you miss a payment or aren't paying down your debt, you can develop a negative credit history over time," said Vanguard Investment Strategy Group's Sarah Hammer. That negative history can cost you more in interest payments to your credit card issuer. A recent CardHub credit card study found that the average U.S. household had a balance of about $6,630. While interest rates started at 12.86% for those with excellent credit ratings, those with fair ratings paid an average of 21.07%.
"A good place to start is with your credit history," Ms. Hammer said. "Go to one of the national credit bureaus. You can find information online and get one of those free reports. Review the report, identify the issues that are there, and then make a plan to pay down that debt over time."
Some planners recommend focusing on paying off cards with the smallest balance first; others recommend concentrating on the highest balance card first. Each has its benefits. Clearing low-balance cards gives you a sense of accomplishment that empowers you to continue on to the next card, while paying down a high balance can save you interest costs. (Of course, you'll want to make at least the minimum payment on any credit card you have.)
Once you've paid off a balance, consider closing the account. It's handy to have a credit card available for emergencies, but having just one or two helps reduce the number of monthly payment obligations you have to juggle.
Include retirement on your list of financial priorities
When you have immediate financial demands on your money, it's easy to put off saving for retirement. But saving even a little over a long period of time can make a big difference in the amount you'll have available to meet expenses when you're no longer working.
Vanguard research shows that saving over a longer period of time allows you to take advantage of the power of compounding—a term describing the snowball effect that happens when you generate more earnings on top of earnings. Because of compounding, every dollar contributed at age 20 can earn more than twice as much as a dollar contributed at age 35, and more than ten times as much as one contributed at age 55.
Notes: This hypothetical illustration assumes 4% annual return, after inflation; amounts in today's (2014) dollars.
Build up your emergency fund
Having some cash set aside for life's unexpected expenses—a leaky roof, a car that stops running, an unplanned medical bill—can help prevent you from getting derailed from your longer-term goals. Six months to a year of living expenses is a good sum to work toward saving.
The most important thing is to get started. "Pay yourself first, no matter how small the amount may be. Even $25 or $50 set aside regularly in a savings account can make a difference when building up your safety net," Ms. Ryan said.
Adjust your plan as demands change
"The only thing constant in life is change," said French author François de la Rochefoucauld. The financial demands you'll face throughout life are no exception.
To help you feel more in control as you juggle your priorities, revisit some—or even all—of these suggestions. It may take some time to find the right balance, but with some patience and planning, you can pull it off.
- All investing is subject to risk, including the possible loss of the money you invest.
- The examples in this article are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.