Want to save money and grow richer? This is the best way to rank financial priorities.


Ready to get your financial house in order? You need to know where to start: how much money you really need at your age to meet your goals — and how to make it happen. Of course, that can be pretty overwhelming if your idea of money management is just making sure your rent checks don’t bounce.

Before getting down to brass tacks on a real money plan, you might find it helpful to take a moment to step back and write down what you want in life, at least financially. Say for starters that you want to be able to pay off your student loans, take at least one great vacation a year and have enough money to be able to say “yes!” when a friend invites you to a concert or out for drinks. Sounds reasonable enough — but these goals mean you will need to do better than just squeaking by each month.

This is where a financial plan comes in. Just like the “order of operations” you may have learned about in secondary school math class, this plan is all about figuring out where your priorities rank before trying to get there.

“We like to have people look at where they are in their life, think forward three years from now and what would have to happen in their life both personally and professionally,” said certified financial planner Jeff Rose.

Now, no plan is one-size-fits-all. Cash flow management is an art, said Jill Schlesinger, the senior CFP board ambassador for the certified financial planner board of standards. Every good plan has some wiggle room, and you may choose to use that to make adjustments for “what’s bugging you the most, what’s making you lose sleep at night,” Schlesinger points out.

Bearing that in mind, here is the best back-of-envelope way to rank your financial priorities, using an easy-to-follow system to achieve financial freedom.

1. Pay down any high-interest credit card debt

This is a crucial step one if it applies to you. Pay only the minimum amount due on your credit card bill? You could be throwing away hundreds of dollars away in interest payments every year. “Credit card debt is just toxic and just has to go,” certified financial planner Douglas Boneparth said in a phone interview.

The average U.S. household is carrying $16,425 in credit card debt, according to Federal Reserve data, and the average annual percentage rate for new credit cards is a whopping 16%. Considering that your savings account probably pays only around 1% in interest (or less), you can see how carrying even a small balance works against you — since any savings you put away likely won’t offset the cost of your debt.

“Too many of us accept that it’s the norm to have debt,” added Rose. Commit to wiping it out, and you’ll be well ahead of most Americans. A good way to start is by making a budget and finding extra cash you can apply to your balance. We’ve listed a few other approaches here and here.

2. Put money in an emergency fund

Paid off that credit card debt and ready to keep transforming into your best (financial) self? Forget eye masks, white noise machines and ear plugs. Nothing helps you sleep at night like peace of mind. And when it comes to money, that means knowing you’ve got cash on hand that you can access on a moment’s notice to pay for just about anything. “I am a big proponent of cash reserve,” said Boneparth.

Otherwise know as an emergency fund, a stash of at least three to six months living expenses (or more, if you have kids) protects you from life’s unexpected expenses, whether it’s a huge bill for that root canal or a deadbeat roommate who stiffs you on the rent.

“Having that cash on hand gives you freedom from lots of things like getting into more debt,” added Rose. “It also give you freedom to be able to do things on your terms, I see a lot of people stuck in a job or a living situation and they can’t do anything about it because they don’t have any cash reserves.”

And here’s where the art of money management comes in: While you want to have plenty of cash squirreled away, “It’s kind of hard to plan ahead for those unforeseen events,” said Travis Sollinger, a certified financial planner in Pittsburgh, who added, “You are better served by paying down [other] debts first. If a true emergency came up you could use credit cards for [an] emergency. Once you have a home you can use a home equity loan.”

That’s why an emergency fund is important but arguably number two on this list. Adding to your credit card debt is never a good idea, but Sollinger’s point is that using extra cash in your budget to pay off credit card debt — which accrues every month at a very high interest rate — simply makes more sense than saving money in the bank at a very low interest rate. This doesn’t mean to skip the emergency fund altogether, but you might put fully funding it on the back burner until you’ve paid off your highest-interest debt.

3. Start saving for retirement — especially if you get a company match.

Getting in the habit of saving for retirement should be your next priority, and some financial planners we spoke to even said it should come before your emergency fund or paying off high-interest credit card debt if you are getting matching funds for your contributions. If not? Then putting it third is a safe bet.

You’ll actually get the biggest returns here if you start saving early. To use an example from NerdWallet, a 25-year-old who gets a dollar-for-dollar employer match contributing 6% toward her 401(k) and earns 7% returns could have $1.8 million saved by age 65. Of course, that assumes she never loses her job — or the company match — and that the stock market delivers. Still, even more conservative assumptions suggest getting into the habit of saving early will yield big returns down the line.

Even those without an employer-offered 401(k) should think about other ways to save for old age, like an IRA. “The one goal you cannot put on hold is retirement,” said Sollinger. While some experts suggest you save at least 15% of annual income for this goal, even just 2% is better than nothing.

Okay, but how do you pay down debt, build an emergency fund and save for retirement all at the same time? It may be a juggling act to start, but again, this is where you want some flexibility with your priorities.

Say you have $300 left each month after paying all your bills.

“I’d like you to be able to put as much into your retirement plan to get a match, even if you have zero dollars in your emergency fund,” said Schlesinger, who recommends putting $150 toward retirement savings, $50 toward credit card debt and the last $100 in your emergency reserve fund. “You want to accelerate high interest payoffs,” she added.

4. Paying off your student loans

As satisfying as it will be to write that last payment for your student loan debt, it shouldn’t be your top priority until you’ve paid off higher interest credit card debt, built an emergency fund and started saving for retirement.

Here’s why: Interest typically accrues on federal student loans at a rate of 7% or less, versus an average of 16% for credit card debt. So you’ll save much more money by paying off your higher interest debt first. If you’re getting a company match for money you’re putting into your retirement account, that’s an automatic doubling of your investment, which is an even better deal.

If you just can’t stand having student loan debt and just want to live a debt-free life, you may still decide to pay off your loans early. “Is it the smartest move? Maybe not,” Rose said.

But if the loans stress you out, and you’ve got the rest of your financial house in order, paying them off early is hardly a disastrous mistake. “Whenever I made my last payment to my student loan, I remember,” added Rose.

5. Paying for a big expense or savings goal

Need a good rule of thumb when it comes to borrowing money? “Don’t put yourself into debt to achieve a life goal unless it’s to buy a house, educating yourself or starting a business,” Schlesinger advised.

That means staying in the black even as you pay for stuff like weddings, dream vacations and yes, buying a car. Schlesinger suggests getting your family to foot the bill for your wedding reception. And if that’s not an option? “Don’t get married until you have money beyond the emergency fund.”

Same goes for cars and vacations. “You don’t use credit card debt for things that are fleeting,” added Sollinger. Of course, if you are earning cash back or travel points, you can pay for your plane tickets and other goodies with a good rewards credit card — it’s just imperative to pay your bills on time.

Indeed, the best way to avoid getting into debt for these things is to start budgeting well in advance: as much as two years ahead if you can swing it.

Finally, remember that it’s okay for there to be exceptions to every rule, and you shouldn’t let the perfect become the enemy of the good in your life. Sometimes you may need to ease up on other goals to achieve the big ones.

That could mean easing up on retirement savings if you’re planning for your wedding, for example, or cutting into your emergency fund if you need more cash to make a down payment on a house. “I don’t know too many people who have an emergency fund in addition to saving for a home. Very few people don’t touch their cash reserve to make this happen,” said Boneparth.

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