Financial Priorities: Allocating Your Next Earnings for Financial Success

We should always have a plan for where our money is going or we will quickly lose track of it. Do you know how your money or where your money is working for you? There is a concept called the “next dollar”. It refers to the idea of making intentional decisions about how to allocate or spend the next unit of currency you earn or possess. It involves considering various factors such as financial goals, priorities, and value optimization to make the most effective use of each dollar. The notion of the next dollar emphasizes the importance of thoughtful decision-making and strategic planning to ensure that money is utilized wisely and in alignment with one’s financial objectives.

I’m sharing an image I’ve created of how I think to best prioritize your next dollar. There are many versions out there similar to this but slightly different. For example Dave Ramsey has his “Baby Steps”, The Money Guys have their “Financial Order of Operations”. This is my version of where I think your next dollar should go. Start at the top and if you’ve completed one box your next dollar should go into the next lower box until each box is complete.

I think there are a couple items on my image that need more definition or explanation as to why they are where they are.

• Emergency Fund 3-6 months living + Enough to cover Deductibles – This is the standard time recommended to be able to cover expenses incase you lose your job or some other event happens. I also include covering your deductibles so you ensure that you can access the necessary medical care or file an insurance claim without facing significant financial strain especially in the age of high deductible plans. Being able to cover deductibles provides peace of mind, protects you from unexpected expenses, and ensures that you can fully leverage the benefits of your insurance coverage when needed, thereby safeguarding your physical and financial well-being.
• Max out Company Retirement Match – If you don’t know what this is it is money that your employer contributes to your retirement savings based on your own contributions. Which means Free Money! By maximizing this match, you’re maximizing the amount of free money you receive, which can significantly boost your retirement savings over time.
• Pay off High Interest Debt > 6% – Debt that carries a relatively high interest rate compared to other forms of borrowing. It typically includes credit card debt, personal loans, payday loans, and certain types of consumer loans. This debt is dangerous because it will potentially drain your money faster than you can grow it. So it is important to take care of this as one of the top items to address.
• Max out HSA – HSAs offer a triple tax advantage: contributions are tax-deductible, earnings within the account grow tax-free, and withdrawals for qualified medical expenses are tax-free as well. This is the best tax advantaged account out there so we want to make sure we utilize vehicle as it protects our money from the government.
• Max out Retirement Accounts – More tax benefited accounts (not as much as an HSA). The more money we can get into these accounts quickly give your investments more time to grow, potentially resulting in substantial growth over the long term. This can significantly boost your retirement savings and help ensure a comfortable financial future.

• Invest additional funds elsewhere to reach targeted savings rate – Once you’ve maxed out the other higher priority items on this list, if you have additional funds and not hit your savings rate (we’ll discuss this in other posts). Invest funds in other investments stocks, bonds, real estate, etc…
• Low Interest Debt – While low interest debt may not carry the same financial burden as high interest debt, paying it off can still be beneficial. By eliminating low interest debt, you free up monthly cash flow, reduce financial obligations, and gain peace of mind knowing that you have fewer financial liabilities to manage.
• Your Choice – I need to explain myself on this one as you’ve probably noticed I’ve put children’s savings in this category, which include things like a 529 plan. I’m of the mindset that children shouldn’t feel entitled to having their college paid for them. I also believe finances are like an airplane mask where you have to take care of yourself first. Guess what, there are always loans for schooling but you’re not going to find a loan for retirement! You should first take care of yourself and then, if you are inclined, you can start thinking of others. This also prevents a vicious cycle where parents go into debt or don’t take care of themselves financial while trying to put their children first. When this happens, many times the parents then have to turn to their kids in their later years for support. This puts a burden on their kids and can set their children back financially. We should all strive to be self dependent which then allows us to start spreading the wealth.

By conscientiously evaluating where your next dollar should go, you can enhance your financial well-being, pursue long-term goals, and make progress towards financial independence. Rather than haphazardly spending or impulsively using money, you proactively assess the potential impact of each dollar and make informed choices.

This concept emphasizes the power of incremental improvements. Small, consistent steps in managing your money effectively can lead to significant financial progress over time. It encourages a mindset of continuous improvement and optimization, making the most out of each dollar earned. Treat your next dollar as a catalyst for positive change, a building block that propels you closer to your goals.

What do you think of my thoughts on paying for children’s education? I bet there are going to be a lot of haters on my opinions around that!