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Lillian Karabaic: Welcome to oh my dollar. A personal finance show with a dash of glitter. Dealing with money can be scary and stressful. Here we give practical, friendly advice about money that helps you tackle the financial overwhelm. I’m your host Lillian Karabaic.
Will Romey: And I’m your producer, Will Romey.
Lillian Karabaic: So we’re going to talk about financial priorities today and this is kind of like maybe your you’re maybe you’re still deep in the holiday season, whatever that means to you. But the new year is around the corner. Not that I think New Year’s is the only time you can decide to start caring about your money.
Will Romey: It’s convenient time.
Lillian Karabaic: But it is a time a lot of people start to think about financial priorities and I have so many people who write in and tell me that listening to the show has helped motivate them to work on their money. And they tell me about their goals and sometimes I get these e-mails that are like, So this year thanks to all my dollar I’m going to establish a second stream of income, pay off all my student loans, start maxing out my retirement account, and save to travel the world for six months and I’m like “whoa, honey back up!”.
Will Romey: One thing at a time.
Lillian Karabaic: One thing at a time. And, I think one of the things that I haven’t talked – because we talk about so many different, diverse financial goals because everybody’s at a different place with their finances that listens to the show, I think a lot of people end up getting that feeling that they need to be doing everything at once and that they’re behind if they’re not maxing out their retirement account, but also paying off their student loans.
Will Romey: And saving for the six month vacation –
Lillian Karabaic: And all of the things right you know the there’s. It ends up being this feeling of like you’re behind, you’re behind the curve, because you hear about people that are in a different financial position than you, and there’s a little bit of that like competitiveness but also just that like existential dread that a lot of us have with money where we kind of feel like oh.
Will Romey: I’m never have enough of it to do anything.
Lillian Karabaic: Yeah or like oh compound interest isn’t on my side unless I start saving right now. And, I think there’s a huge benefit to emphasizing that setting financial priorities – 1) it doesn’t have to be complicated. As always we, have had multiple episodes I’ll link to in the show notes about the fact that I always think this starts with your values and kind of this, this exploration of what you really care about. But, for a lot of folks that are kind of just getting started with their money, it’s actually not that complicated because there’s only so many goals that you can do.
Will Romey: Right, yes?
Lillian Karabaic: Which are which are they usually follow into these three buckets: increasing income, reducing debt, and saving money. Those are those are the only those are really the only things.
Will Romey: I guess that’s all you really can do with money.
Lillian Karabaic: Well I guess maybe the fourth would be setting up systems.
Lillian Karabaic: The fourth would be setting up systems right. So and I think that is actually like I’ve talked before about why I think budgeting and sinking funds and you know setting up rituals for yourself with your money can be incredibly powerful and and that kind of helps you lay the base. But you know, I will run through – you can find these in my book no sponsorship here –
Will Romey: just they are
Lillian Karabaic: It is sometimes it’s easier to read these things and there’s cats in the book so you can’t find these in my in my book. But this is what I have on as kind of the basic financial goals. So if you’re just getting started with your money and you don’t have anything in savings, I always recommend that you start setting up the systems and that is to start budgeting, and save a one month buffer. And the reason I use the term buffer as opposed to emergency fund is one month, it could take you a long time to get to the point where one month – you have one month of expenses in savings and I define this as one month of expenses not one month of income because hopefully you are living below your income. Right?
Lillian Karabaic: So you’re you’re spending less than you earn right.
Will Romey: So your income and your buffer shouldn’t be the same.
Lillian Karabaic: Yeah. Yeah and they might be if you’re spending 100 percent of what you make then your one month’s expenses will be the same as one month’s income. And this can feel really overwhelming if you’ve never you know saved money, but we’ve talked about on the show some ways to kind of get there. One big one that will be coming up for a lot of people if you’re on the lower income side of the spectrum, it’s very likely you will get some sort of tax return. That is maybe less true if you are primarily an independent contractor you might not get a tax return because you may not be paying quarterly taxes.
Will Romey: Exactly.
Lillian Karabaic: But if you do get that tax return that is a great way to get yourself set up without having to kind of find that money in your monthly budget.
Will Romey: Right. A big infusion you can kind of use to almost blueprint those goals.
Lillian Karabaic: Yes yeah.
Lillian Karabaic: And the reason I’m a big fan of that one month buffer is if you’ve been stuck in a kind of “panic mode” with your money getting to the point where you’ve got that one month is it does give you some breathing room that is a typical amount to give notice on a contract that’s quite often how you know how much your bills. How often your bills come through your rent, one utility.
Will Romey: One Financial cycle. Yeah.
Lillian Karabaic: One financial cycle for a lot of folks. And then the second goal I recommend after you’ve done that is if you do get a match on your 401K or your 403B at work where they are giving you free money based on you giving. So usually it’s 3 percent or 1 percent if you do get a match contribute up to that match on the 401K. Yeah and the reason I have you do that before any other financial goal is because it’s free money. Don’t turn it down. It’s great. Don’t leave it on the table. If you have a really, really generous match and you’re thinking maybe you want to focus on other financial goals, maybe you don’t have to give up to that match. So yeah I’m by really generous match, I mean you get matched up to 10 percent or something like that.
Will Romey: That’s substantial.
Lillian Karabaic: You may work a job where you have to contribute giving have to continue contributing to your retirement. If you have pension or something like that where you’re just required it’s there’s a mandatory contribution but most people that listen to the show are probably not in that situation because that’s more and more rare.
Will Romey: And if you aren’t you don’t have a choice, so Whatever. Yeah you just kind of write it off just the same as you would with taxes.
Lillian Karabaic: And then the next recommended goal that I have as far as financial priorities is to pay off all debt other than mortgage and there’s kind of different methods for these. Remember we talked about how setting up systems is kind of laying the base for all financial goals and paying off your debt. It could be done with debt snowball method or an avalanche method. Whatever method ends up working for you. The reason I have that as a step before I have any of these other increasing you know income or saving three to eight months of expenses in an emergency fund is that saving – is paying off debt gives you so much more flexibility in approaching other financial goals. So if you got those student loans hanging over your head, or those medical bills hanging over your head, it makes it a lot harder to prioritize other financial goals – because it is taking your income away every month, right? When you’ve gotta pay those monthly bills, you’re losing out that portion of your income that goes towards those debt payments. And so I’m a big fan of paying off debt. And that being, said paying off debt – all debt a mortgage can be a really massive goal. And maybe that sounds kind of like an unsustainable goal. And the reason I have that bucket is I just don’t know your own circumstances. So this is where you have to look and personalize it for yourself.
Will Romey: Right.
Lillian Karabaic: So it could be that your big financial goal for the year is to pay off one of your student loans- your Stafford loans unsubsidized loan or your private student loan that has a really high interest rate. Or it’s to pay off that credit card bill before your promotional period where it stops having zero percent interest is done.
Will Romey: Whatever one makes the most sense with its quantity and interest rates and how it impacts you I guess.
Lillian Karabaic: Yeah and this is one of those things where people get really caught up in in researching strategies and running into numbers and it just doesn’t have to be that complicated. And the other thing is that you know if you are in a position, where you’re really struggling to pay your minimums on all of your debt this is the time where perhaps your first financial priority is to figure out a strategy where you can keep paying all the minimums on your debt which may involve increasing your income. But this is one of those things where this could encompass other financial goals by establishing that one priority.
Will Romey: Yeah that makes sense. And it’s the one that like you said it’s kind of hanging over your head.
Lillian Karabaic: Great right. And I think it’s the the power of working on on attacking debt is that it really can help propel other goals in a way that you don’t necessarily expect because, if you’re really focusing and planning and attacking for your debt – you start to realize how much other things start to play in place. And this is just one of those things. It’s it is a it is a multiplier in terms of other financial goals because every time you pay off one of those debts you have more money to apply towards your other debts or you have more money to save.
Will Romey: With the interest. I remember you made this point a while back really interest – It’s really sort of stretching your money further in a way.
Lillian Karabaic: Yeah. No it’s there. There’s so there’s so many great things about focusing on paying off debt. And the reason I don’t include the mortgage in here is because I don’t want you to focus on paying off your mortgage when you don’t have an emergency fund set up. That’s because houses are expensive. The other thing I would say is the next goal that I have on this is once you’ve kind of focused on paying off your consumer debt is then other than your house, is then focusing on establishing an emergency fund and we have some shows where we’ve talked about how to figure out an emergency fund. Usually it ranges anywhere from three to eight months of expenses.
Lillian Karabaic: It’s kind of the standard emergency fund and you’ll be at the high end if you have very variable income or you work in an unstable industry or you have potentially very expensive medical expenses then you want to be on the higher end of what you’re shooting for. If you have a pretty stable job and relatively low expenses and you know you’re you’re likely to have a large amount of notice if something significantly changes your with your income then three months would be kind of the standard rule. Yeah and when you’re choosing your emergency fund abou. One thing to factor in because you know obviously I say just a one month buffer before you start to focus on your debt – a thing to know about that is if you sit down and you do the calculations and you get your debts organized and it’s going to take you longer than say five years to pay off all that debt other than the mortgage.
Will Romey: Yeah.
Lillian Karabaic: Then I would recommend a little bit more than a one month buffer because five years is a fairly long time series to only have one month in savings, does that make sense?
Will Romey: I mean that’s just the longer you go the odds increase that you’ll need it at some point. Yeah
Lillian Karabaic: And so but the big thing I want to emphasize is I’ve just given you already a lot of goals right. But I want you to notice that those come in an order and this is because when it comes to choosing your financial priorities for the new year – I think it’s really easy to get caught up in. “Oh you know it’s just the same as any other New Year’s resolution. Oh I heard my friend is going to try to read 100 books this year. I should start reading 100 books.” Well, is that really your priority? is that really how you want to spend your time? It’s a great New Year’s resolution but if you don’t step back and look at the tradeoffs that you’re making because everything is a tradeoff, maybe that means you’re spending less time with your friends if you’re in your house reading every night. This this – It’s even easier to quantify this in terms of money right.
Lillian Karabaic: If you’re like I want to save an emergency fund but that means that you’re going to have to pay off your student loans for two more years because you’re prioritizing the savings for that emergency fund. You have to realize that there’s a tradeoff there right. So I really recommend choosing one financial priority. So if you’ve kind of accelerated through that you’re like “Hey I got my emergency fund. I have my debt paid off. I’m contributing up to the match. I’m budgeting. I have my systems in place.” Then there’s kind of sub goals, quite often a sub goal can be saying saving up for a down payment or something like a six-month sabbatical to travel the world.
Lillian Karabaic: I don’t recommend saving up for something like World Travel or a down payment until you do have that emergency fund in place because you want that emergency fund when you either move into a new house.
Will Romey: Or have an emergency.
Lillian Karabaic: Yeah or a run around the world. And, once you’ve kind of figured out what those short-term goals are, which to be clear, I say short term goals – I mean short term in the range of 1 to 3 years. Short like I don’t necessarily mean you should have this all wrapped up in three months.
Lillian Karabaic: Very few people save a down payment for a house in three months not.
Will Romey: Without a bunch of like other financial re-prioritization I bet.
Lillian Karabaic: Yeah. Yeah. Or you know a really significant hammer as we like to call it on this show aka income. So once you’ve kind of figured out that sub-goal and it’s OK to have that be your only goal for the year and one of the things about setting these financial priorities and getting the systems in place is that when you’re focusing on a goal like something like saving for a down payment you’re able to just go back to the. “But this is my top priority and it makes it that much easier when you have to say no to things”
Will Romey: Yea yea yea
Lillian Karabaic: Or you know you get jealous because someone else is maxing out their IRA which is maybe my own particular form of jealousy.
But you know you get jealous of of of people’s vacations on their Instagram, and they’re you know they’re like cool vacations that they’re going on or everybody’s going on an expensive bachelorette party and you can’t afford it because you want to save up for a down payment. Like it really helps to know that you’ve got that one locked-in financial goal because you can frame the trade offs you’re making in terms of that goal. If you are balancing seven goals, it’s very hard to figure out what the tradeoff is right. If you’re like I’m saving for an emergency fund but also I’m trying to pay off my student loans.
Will Romey: It’s kind of ambiguous from all those seven goals but if it’s something more direct.
Lillian Karabaic: If your goal is to pay off your one student loan that you know if you put five hundred dollars a month on you will have it paid off in 18 months and you’re able to say, if I don’t go to that bachelorette party this month that means I can make an extra five hundred dollar payment or you know it means, I’ll be on track to pay this off. You can imagine what that looks like as far as your goals for the next year. So it helps you frame in terms of that tradeoff. Or you know, you’re able to say oh I’ll have an emergency fund in place that much sooner, right?
Will Romey: Yeah. So yeah there’s there’s concrete reasons to stick to your goals.
Lillian Karabaic: Yeah I like it. And then the next thing I recommend of course is maxing out your IRA a which is 5,500 is the combined Max between Roth and Traditional. We have plenty of episodes about Roth versus traditional – So go listen to those if you want to figure out which one makes sense for you and then the next goal is contributing to your for 401K at 15 percent or more of income. The rule of thumb is that you do want 15 percent of your income being saved for retirement. This is of course after you’ve dealt with your other financial goals – getting of.
Will Romey: In order.
Lillian Karabaic: Yes in order. And then that last financial goals where you get some real fun. It could be investing in taxable accounts as we’ve talked about before in the show or paying off your mortgage early or saving for a sabbatical, long term sabbatical.
Lillian Karabaic: Any of those things after you’ve prioritized some retirement savings. So that was a lot of goals but I want to emphasize real big things. Make sure the goal lines up with your values.
Lillian Karabaic: This one’s really important and as we’ve talked about before of course if you’re working on paying off debt it can be really hard to see where this lines up with your values but that’s for sure. It’s not like my personal values include paying interest to student loan financiers.
Will Romey: Right. Well they’re not intrinsically but paying off your own debt Maybe it’s more value-oriented.
Lillian Karabaic: By itself like it can be soul-satisfying. But I like to think about what that freedom represents to you. Right. So you’re you are using this to position yourself to live according to your values. As far as paying off your debt because, maybe you’ve got you maybe you know you have a bunch of medical debt because American health care is broken and you’re not like – but it doesn’t really line up with my values. You know like I’m doing this because I owe this debt not because
Will Romey: I want to.
Lillian Karabaic: To feel like I should have to pay this off but one really cool thing is to think about how you’re going to be able to use that money in line with your values. Maybe reducing the amount that you work to raise children or you’re gonna be able to save up for your forever home where you can foster a bunch of kittens and it’s a good thing to disambiguate you.
Lillian Karabaic: Yeah it’s helpful to separate that – and I’ve got a couple more tips but we are going to have a quick break before I come back with some more tips about how to stick with your goals.
Lillian Karabaic: Welcome back. Our sponsors help us cover the costs of the show since not everyone is part of our personal finance society and ca make it a priority so thank you sponsors!
Lillian Karabaic: So we’re talking about ways to stick to financial goals and I think picking your financial priority is really important. But once you’ve got that financial priority once you’ve figured out what it is and we really talked about how there’s only four buckets, it’s like increase income increase savings, reducing debt, and setting up systems, right?
Will Romey: Yup.
Lillian Karabaic: And I think setting up systems can be part of the other financial goals. This is one of those things where I think you can set up systems and have a single financial goal but you’re setting up systems can and sticking to systems can be your only financial priority for the year. We actually talked about this with you Will. That’s kind of your main financial priority right now is to make sure that you stay on top of managing your money.
Will Romey: Yeah sort of work can continue to be off of the roller coaster.
Lillian Karabaic: Yeah really. The financial rollercoaster is no fun so one thing, in addition to kind of figuring out that the goal lines up with your values, I’m a big fan of creating concrete reminders. So once you’ve kind of picked that financial priority I like to figure out what the reminder that will work for you is. So this could be something like a note wrapped around your debit or credit card. That’s like hey is this line up with what you’re you know let’s spend less money on this slow yourself down. Maybe yeah. Or putting it on your mirror where you’ll see it every morning and you’re like “oh hey look I’ve paid this much on my student loans” or maybe a reminder on your car dashboard to not park in the zone where you constantly get tickets.
Will Romey: Or they’ll leave you a reminder.
Lillian Karabaic: Or if you’re trying to save more money by shopping less maybe using a browser extension that blocks those impulse shopping Web sites and puts puts up a picture of the house that you’re trying to save money for – or whatever instead. Creating some sort of concrete reminder because money is one of those things where, we spend it all the time yet it’s very rare that it feels very tangible to us right and feels truly linked to our goals as a person. So figuring out a way to bring that into your daily life.
Will Romey: Well that all sounds like a good way to sort of interrupt the “Want something, spend money” cycle.
Will Romey: Yeah right. And it doesn’t even just have to be spending money, right? It can be you know oh there is a physical reminder where I only you know where I schedule some time, which is my next tip. Fancy that where it’s very specific perhaps you actually schedule an hourly slot at 5:00 p.m. on Sunday’s to go over your budget, or it could be something like I will spend two hours balancing my budget and sending an extra payments to my student loans between the 1st and the fifth of the month each month. Right. Like that’s kind of a little more vague or every Monday morning I will add together all the tips I made from this weekend and I will take them to the bank and deposit them into my savings account.
Will Romey: I like that. That’s good. I’m just scheduling in general. I’ve never Methuselah sick about finding time to even just pay bills.
Lillian Karabaic: Yeah. And we’ve talked before about how how to make money activities more satisfying to you. And I am a huge fan of the positive association with building with it.
Lillian Karabaic: So I get really nice hot cocoa when I do my budget on Sundays. And that means I can kind of look forward to it. And this is really important, too if you live in a household with children or otherwise folks that depend on you being able to schedule out that time where you can actually just focus, either by having someone come over and babysit or doing it when you know the kids are at swimming lessons or whatever it is actually carving out that time to recognize that this is dealing with your money kind of underlies a lot of other goals not just financial. And it really can give you that sense of calm if you set it up in a way and schedule it in such a way where it gives you that feeling.
Lillian Karabaic: As opposed to the panic feeling when you.
Will Romey: – I got to bust out these bills before they’re overdue which I do.
Lillian Karabaic: And then my last goal is to find a co-conspirator. And if you have a partner that you’re financially merged with, this is a really obvious coconspirator in financial goals, but that this could also just be a friend who’s working on a totally separate financial goal that you check in with. And you know I have this advantage of Will and I have this radio show that we can talk about our own financial goals. But most people do not have access to that. And you know, we kind of knew that we’re gonna be vaguely accountable about our finances on air.
Will Romey: Yeah.
Lillian Karabaic: But a co-conspirator could be someone that you check in with. This could be something that you do to build the positive association. Hey you get to go out for fancy coffee with this friend every you.
Will Romey: Every time you make a financial step.
Lillian Karabaic: Yeah. Yeah. And check in and see see what’s going on. It could be someone else it’s focused on the same goal or someone else that just is willing to talk about money. And it really, really helps to have this person because it can help keep you on track. And we’re so weird about talking about money that it can be hard to focus on a financial goal and not have any outlet for sort of bouncing it off someone. So especially if you’re single, you’re in that kind of position where you don’t necessarily have anybody that is a natural person to talk to and it can be kind of hard to approach a friend and awkwardly go.
Will Romey: “Let’s talk about money.”
Lillian Karabaic: Yeah. We talk about money. Are you into talking about money. So those are my tips for choosing a financial priority. Big takeaways here.: Don’t try to focus on too much at once, you will get around to it, step by step. It will end up – you will get compounding effects if you choose one thing at a time and not try to do everything. Setting up good systems which includes scheduling some time and possible physical reminders or concrete reminders for yourself and find a buddy, even if you’re kind of an introvert it just helps to talk about these things. It really does. Unfortunately we’re just kind of weird about it and posting on your Facebook about it is not really the same.
Will Romey: So yeah real people.
I would love to hear about what your financial priorities are for this year.
So if you are you plan on keeping to those goal.
Yeah. And how did you do for 2018? How did your financial priorities go? Do you dispose of these new year’s resolutions ideas entirely and started your financial kind of Priority setting at a different time of year? I’d still love to hear about it.
Will Romey: We’re in retrospective season.
Tis the time but my favorite time of year! I love goal setting. All right. Will, I think that wraps our show for today.
Will Romey: Show wrapped.
Lillian Karabaic: Yeah. Send in your financial priorities or other financial questions to firstname.lastname@example.org And our producer is Will Romey. Our intro music is by Aaron Parecki and I’m Lillian Karabaic, your personal finance educator and host. Thank you for listening. Until next time remember to manage your money so it doesn’t manage you.
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