A version of this article originally appeared in New York Daily News.
Q. I have more than one financial goal, but I can't afford to save for all of them. What do I do?
A. I spend a good amount of time working with young professionals on a financial planning concept called "goal priority."
Goal priority allows savers to organize their financial goals in such a way that they can more easily select which goals they should be saving for versus others.
Before you can begin to prioritize your financial goals, however, you first must identify them.
Financial goals may include things such as saving for a home, preparing for a family, building a cash reserve, saving for retirement or paying off student loans.
Once you have identified these goals, you can begin to think about which ones are the most important to you now.
For example, let's assume that you can currently afford to save $750 per month and that you already have a cash reserve of $24,000, which equals approximately six months of your living expenses.
Let's also assume you have been making student loans payments of $500 per month.
Now, in addition to all of this, you have decided you want to buy a home in three years, which will cost $300,000.
In order to realize your home savings goal, you would need an additional $36,000 on top of your current cash reserve to afford a 20 percent, or $60,000, down payment on a $300,000 home.
However, with only $750 to save each month, you would only be able to save $27,000 over the next three years, falling $9,000 shy of the home savings goal.
Here's where goal priority comes into play.
After thinking critically about your goals and prioritizing them, you have determined that buying a home is more important than quickly paying off student loans.
Therefore, if possible, you could reduce your student loan payments by $250 per month and increase your home savings enough to make the down payment in three years.
Alternatively, you could reduce other savings, such as contributions to employer retirement plans.
This example may be a tad oversimplified, since it does not account for any potential increases in income or reductions in living expenses, but it proves the concept.
While goal priority often involves short-term sacrifice, it is a good way to become more organized and honest when it comes to your financial goals. It can also remove confusion and frustration, thereby creating focus and clarity. A CFP® professional can help you prioritize your goals.
Lastly, it is important to recognize that there is no right or wrong answer when it comes to goal priority. After all, it's your life.