As I was getting into my personal comfort zone on seat 23-F (a window seat) on Alaska Airlines, I really wasn’t paying any attention to the Flight Attendant’s visual presentation of the Federal Aviation Administration’s (FAA) requisite announcement of 1) where the exits rows were, 2) that my seat can be used as a floatation device should we have to make an emergency landing on water, and 3) that in the event that our cabin loses air pressure, my own oxygen mask would conveniently drop down in front of me.
On that last item announced, they suggest that if you are traveling with young children, you (the adult/parent) should put your mask on first ‘before’ helping others. Many of us have heard this message so many times, that we could probably do a funny parody to post on YouTube. But then something clicked, and I had one of those rare epiphany moments!
In the quest for my clients to stretch their dollars like a 20-inch string of mozzarella cheese being pulled from a hot slice of pizza, the most frequent question almost always undoubtedly arises: “Which objective or goal should I fund first?” This is where the advice from FAA’s regulations about getting ‘your’ oxygen mask on first struck me as a parallel to financial planning.
You see, the reason you are asked to selfishly take care of yourself prior to your loved child is that if you were not able to secure a mask on your child in the short time before “you” ran out of oxygen, it is possible that both of you could perish. The airlines know that some people would not have enough oxygen in their body at the time a sudden loss of pressure occurs to stay conscious and lucid for more than 30-seconds. So, if you can get your mask on (and oxygen flowing) right after a pressure loss, you would have plenty of time to diligently and properly situate your child or an unable passenger next to you with their own vital supply of oxygen.
The same goes for personal finance…albeit, it happens at a much much slower pace—over many years. The classic stretch of money is that of college versus retirement savings. In an ideal world, you would have enough money to appropriately fund both. But not everyone has enough discretionary income to have that option. Reflecting back to the FAA advice of taking care of yourself first, I agree. And I agree that this applies to personal finance as well.
Can you or your child take out a loan for college? Yes! Can you take out a loan for a home, car, business purchase, or incidentals? Yes again. Now, can you take out a loan for retirement—at a time when you don’t have a job to pay a loan back? No! And that is my point. Unless you had the proverbial crystal ball that foretold your income and financial situation for those years after your child (and his/her expenses) left the nest, or your business was built, or any other ‘priority’ expenses you threw money at in lieu of your personal savings, you might just be hurting yourself in the long run.
In the process of creating symbolic and literal ‘buckets’ of money for specific financially related goals, I would like to believe that my clients understand the purpose of satisfying needs over wants, and commensurate funding of them in order of importance. In my opinion, a basic guide of funding importance would be as follows:
- Cash/checking for everyday expenses…i.e. groceries, gas, mortgage, insurance premiums, etc.
- Savings for frequent larger expenses…i.e. home/auto repairs, gifts, vacations, etc.
- Emergency funds…i.e. medical, legal, tax, loss of job, family emergencies, business startup, etc.
- Retirement funds…because your purpose of working now is so you can retire! And who’s going to give you a loan when you aren’t working?
- College savings…because compound growth and dollar cost averaging can be your best friend!
- Charitable gifting…because you can!
While this is not a complete list, nor is it absolutely critical that one funds their priorities in this order, it provides an outline for the way I work with my clients, their money, and their goals. The importance of being able to rank funding priority of your goals is the same as using a road map to get from “here” to “there.”
If you’ve had a change in your life through a marriage, divorce, child birth, new business, death, or inheritance, it may be time to sit down and discuss your new list of priorities. “Yes,” priorities change from time to time, and it is critical that you know how to prioritize your newfound situation in a financial sense. Call my office and book an appointment today to get an early start on the 2014 year! We can create your hierarchical list when you get here.