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Updated on Wednesday, October 14, 2015
Congratulations, you’ve made it to your thirties! You know a little bit more about who you are and what you want than you did in your 20s, and you’re entering your prime years to focus on what you want to accomplish in your life.
But you also have to decide how to save for retirement and pay down debt like lingering student loans, while figuring out how to start a family. Oh, those competing financial responsibilities. How are you supposed to make such big decisions when everything seems equally important?
It’s actually simple if you follow a process. It’s called IPO: Identify, Prioritize, Optimize. We all have various goals vying for our attention and IPO gives us an initial framework to help us organize our thoughts – and therefore, our actions.
Here’s how to make this framework work for you:
Step 1: Identify All of Your Goals
Set aside 30 minutes to brainstorm what you want your life to look like, now and in the future. Don’t censor yourself. Just get all of your goals out and on paper. Have fun with this and remember the possibilities are limitless.
Step 2: Prioritize Those Goals
Now it’s time to come back to reality and get serious about what’s truly important to you. Focus on the goals that connect with your values first. For example, if you value family, what are those goals that bring that value alive? Is it getting married? Having kids?
Narrow down your list from your brainstorming session to 10 goals, large and small. Place them in order of importance. You need to prioritize because we usually find ourselves with far more goals than money to fund them. Ranking goals by order of importance increases awareness of what really matters to us.
Step 3: Optimize Your Cash Flow
With this step, you’re going to determine how you’ll use your money to accomplish those goals you listed. Look at your income and expenses and make adjustments to where your money is going. By identifying how much money is coming into your bank account (your income) and how much is going out (your expenses), you’ll see how much money you have left over at the end of each month to put toward your goals.
If you’re like most people, you’ll realize that you may be spending money on things that aren’t all that important to you. (This is a good time to revisit the list of prioritized goals from step 2.) If you find that you aren’t at least paying the minimum payments on your student loans, yet you are spending $300 on restaurants and take-out, it may be time to dial back meals out and funnel the extra savings toward your loans.
Balancing All Your Priorities
This is all well and good if you’re clear on one big thing you want to accomplish. But we’re dynamic human beings, and we’ve all got a lot going on. How do you know how to balance paying down your loans, saving for retirement, and starting a family?
There’s no easy answer, but there are a few rules of thumb to follow (in this order):
- Make sure that you’re paying the minimum acceptable amount on your student loans each month.
- Check with your HR department at work to make sure that you are contributing enough to your 401(k) plan to receive the full company matching contribution. This is money you don’t want to miss out on.
- Consider how important it is to start a family. Are you doing it because you “should” be doing it, because your parents are pressuring you, or because you are truly ready to settle down and have children? Many people do things for the wrong reasons, so make sure you are connected to “the why” behind this goal.
If you are achieving the first two things in the above list and you have extra money at the end of the month, you can start saving to start a family immediately. Set up a separate savings account, label it “family” and add an automatic monthly transfer from your checking account.
The amount will vary based on your situation, but start with any number and see how easy it is to save when you don’t have to think about it. You can then increase the amount saved once you realize that you don’t even miss that monthly savings amount.
On the other hand, if you don’t seem to have any money to put toward saving for a family, then you have to figure out what you can do to save. Some people like to wait for a bonus and move at least a portion of that money into the family savings account. Others will use a tax refund to fund the account.
One additional strategy is to reduce your spending on the expenses that you really don’t care about. This could help you save hundreds of dollars a month.
Case Study: Balancing Retirement, Debt and Family Planning
I recently helped a couple in their early thirties prioritize these important goals. Tom and Mary made $150,000 as a couple and had a combined $40,000 in student loans, and they needed to figure out how to financially plan for a child. They weren’t sure how to save for this new addition to their family and continue to save for retirement at the same time.
Although we did some serious planning, we also gamified it; we approached this issue like a game of Tetris. We first set specific parameters for each level – or goal, in this case. This is what the game looked like:
Student Loan Goal: The minimum total monthly payment for all loans was $1,000. That was our target amount. Once we ensured we hit that amount each month, we unlocked the next level.
Retirement Saving Goal: We set a retirement savings goal of 15% of total income. (This percentage included the employer matching contribution.) Since their total combined income was $150,000, a 15% total contribution came out to $11,250 each. They both received a 5% matching contribution through work, so that meant that they had to contribute 10% of their own money (or $7,500) in order to achieve this goal. When we hit that percentage, we knew we could move on to the all-important goal of financially supporting a new child.
Just like a game of Tetris, each goal represented a new level. Once we hit our target, we unlocked a new level.
Although they didn’t actually have to save the $600 per month at the time, we wanted to perform a trial run to make sure they were in financial shape to afford the expenses that come along with having a baby. Based on their current income and expenses, we did need to make some adjustments to their current spending in order to hit all target amounts.
Tom and Mary were able to reduce how much they spent on meals out and they traded in their luxury car with expensive monthly payment for a sedan that cost much less. By taking these actions that aligned with their priorities, they were able to easily meet their student loan and retirement goals. They’re now working on creating a habit of having $600 available in their monthly budget for their baby.
It’s not always easy to change current habits, but with some practice they put themselves on track to accomplish all three goals!
Committing to the process is the first step. You may not have as much to spend on everyday expenses each month, but you’ll feel good knowing that your personal finances are more in line with your values. In the end, it’s not about the money. It’s about living a life you love. And knowing how to identify, prioritize, and optimize can help get you started on that path.