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Resolving conflicts and understanding your priorities
After you've clarified your priorities, what do you do with your new insight? Each
time you spend more than pocket change on a purchase that doesn't help you
with attaining your goals, you may want to ask yourself if your purchase is a
necessity or if it's an impulse buy.
For example, let's say your highest priority is starting a savings account. And let's
say you also saved $1,000. Then, one day a friend asks if you would be interested
in taking a mini cruise vacation. The total cost of the mini-vacation will cost
approximately $600. If you take the trip, you'll be dipping into your savings
account, and you will also be further from your goal. This is where proper planning
steps up to the plate, and we're going to dive right into that shortly.
Allocating your income for current pleasures, necessities and retirement takes
proper planning and a certain mind-set. Also, remember that as the years go by,
your priorities change. You'll need to reexamine and rank your needs regularly
throughout life in order to use your money most effectively.
Acquiring the habit of quickly prioritizing every desired purchase against your
financial goals will reap many rewards. Of course, the biggest reward will be the
ability to gain control over your spending, as opposed to your spending having
control over you.
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Some Financial Goals to Consider:
Getting out of debt
If you struggle to meet credit-card payments every month, then face it: You
probably need to shed or consolidate some of that debt. For example, suppose
you owe $3,000 in outstanding credit-card debt at a 16 percent interest rate and
a $10,000 car loan at 9 percent. To pay off both these obligations in a year, you'd
need an additional $1,150 a month.
Paying for college
Tuition, room and board at a private college costs around $30,000 a year today,
and that bill is projected to reach $78,000 (based on projections by T. Rowe Price)
by the time this year's newborns are of college age. Your children may qualify for
financial aid either in the form of a scholarship or a loan, and many students work
their way through college.
However, most states offer education savings accounts in which after-tax
contributions grow tax-deferred until they're used to pay for the child's college
education.
If being able to pay your child's college education is more important to you than,
say, driving a luxury car, then stick with a family car instead. Let your priorities direct
your discretionary spending.
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Retirement
A popular rule of thumb claims that retirees
need only 70 percent of their pre-retirement
income to maintain their lifestyle, since they
no longer commute to work. However, other
costs go up in retirement, such as utility bills
when you're home all day, the price of hobbies
and other diversions -- and, of course, the cost
of health care as you age. Some retirees find
they need as much income in retirement as
they spent while working.
Unfortunately, traditional pensions pay only a
fraction of your salary, and Social Security will
not make up the difference. If you have no
retirement plan at work, you should contribute
to an IRA.
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