When you first encounter the subject of personal finance, you may be tempted to jump right into trying to understand the best debt payoff method, the right retirement savings vehicle, which investments to buy and when, or how to get the best credit card rewards. But without being properly motivated and focused by your own values and goals, hectic personal finance activity won’t result in satisfaction and will possibly burn you out. Before getting into the detailed strategies you may use, take a step back to ask yourself: What are my values? Considering those values, what goals should I set? Only after determining what is really important to you will you be able to properly choose the strategies to implement your goals.
Personal finance is personal. Only you can answer those initial questions and your answers won’t agree with everyone else’s. Even if you end up using the same strategy as many other people, your reasons behind choosing that strategy will be your own. There may come a time that you change your strategy where others may not, because your strategy has been dictated by your goals and your goals by your values.
You have likely been influenced by the people around you or societal trends in regards to how you articulate your values and goals, but ultimately they are up to you. There is no point in considering strategies without having your values and goals in front of you, both because the strategies may be inappropriate for you and because you likely won’t be motivated to stick with the strategies without having a firm grasp on why you’re using them.
1) What are your values?
It is helpful to articulate both your life values as well as values that pertain specifically to personal finance. Identifying your values will help you determine what areas of your life are important to spend money on and what aren’t so you can set your budget and goals. They will also inform your strategies, as some strategies may be in conflict with your values. An exercise that will be helpful in figuring out what your values are is to imagine what you want your life to be like in five, ten, or twenty-five years.
My top five values are: God, marriage, security, health, and community. Other values are: freedom, family, creativity, peace of mind, adventure, etc.
Personal Finance Values
One of my chief values that is not necessarily shared by everyone is living within my means, which for us translates to not going into consumer debt. A value that I don’t have but many others do is be free from their 9-5 jobs. It’s also vital to clarify your attitudes toward debt (under what circumstances is it permitted or encouraged) and your risk tolerance.
2) What are your goals?
You can see that your goals will flow from the values that you identified, both for how you will live in every budgeting period as well as how to set up your long-term savings.
My values of God and security mean that with every paycheck we receive we tithe and save for retirement. If you value home ownership, you would want to aggressively save a down payment or money needed for renovations. You would prioritize this over spending in other areas like cars and vacations. If you value adventure, you would make room in your budget either for building adventure into your everyday life or for saving up for bigger, less frequent adventures.
Common goals that people starting out in PF have are:
- saving for retirement
- paying off debt
- buying a house
- buying a car
- reaching a certain net worth
When you are setting your goals, be sure to make them SMART!
3) What strategies will best help you to reach your goals?
After you have set your goals, you can geek out as much as you like on figuring out how to accomplish them. The strategy you choose may not be exactly the same as someone else with a similar goal, depending on your values.
For instance, the two leading debt-payoff strategies are to prioritize either the debt with the highest interest rate or the debt with the smallest balance. Your goal may be to pay off debt, but the strategy you choose will depend on what best motivates you personally.
Another example of how your values would influence your strategies would be in your asset allocation in meeting long-, medium-, or short-term goals. Your risk tolerance as well as your desire for peace of mind, security, or high returns will dictate which investments you choose – you might keep your savings in cash for complete security (except against inflation) or take more risk to potentially make more money.
I hope this post has convinced you to take some time to examine your unique values and goals before you jump into budgeting or implementing other strategies!
Do you review your values and goals before you decide on strategies? Have you ever used a strategy that turned out to be the wrong one because it didn’t align with your values and goals?
photo from Free Digital Photos