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April 12, 2023
All of us have a finite number of resources. Each dollar can only be spent once — whether saved, invested, or used to pay off debt.
April is synonymous with spring. But the warm weather and sunshine also bring tax season.
This season helps (and sometimes forces) people to look at their savings, charitable contributions, retirement planning, and overall financial goals. Finances do not need to be overwhelming. Taking control of your future starts with financial triage.
What is Triage?
Imagine walking into the emergency room with a minor injury. You are at the top of the list to be seen immediately. Moments later, a patient comes in who needs an emergency appendectomy. They are now the top priority for the ER staff, and understandably so. Physicians cannot be with two patients at once, so the ER staff needs to ensure patients receive treatment in the appropriate order.
Financial triage operates on the same principle. All of us have a finite number of resources. Each dollar can only be spent once — whether saved, invested, or used to pay off debt. Once that dollar is given a “job,” it cannot be used again. Every dollar we spend is being triaged. We often do not think about the individual dollar. Standing in line for a Coke and a McChicken, no one thinks about how $2.14 spent today will be worth $23 in 30 years. But that is the reality. Before we dig in too deep, this is not another post arguing about skipping that daily coffee of avocado toast so you can retire. Instead, start building your financial habits around what you will do with the next dollar.
The Next Dollar
The goal is to know where to spend our next dollar before it burns a hole in our pocket. As we are approaching the end of tax season, a perfect example of an influx of cash would be a tax refund. What will those extra dollars be spent on? Personal finance is just that, it is personal. But if you are seeking general guidance, the following is a wonderful place to start.
We all need a parachute when things go wrong, and they will. Our financial lives are rarely linear, and when emergencies arise, you need to be prepared. Make sure to have at least one month of emergency expenses covered.
High Interest Rate Debt
With emergencies accounted for, it is vital to eliminate as much high interest rate debt as possible. This could include credit cards or personal loans. Some loans like a mortgage or an affordable car payment should be excluded from this category as their interest rates are usually much lower.
When it comes to retirement funding, always capitalize on an employer match. Beyond that, shoot for about 12 to 14 percent of your income. Consistently building your retirement fund will pay off in the long run.
Full Emergency Fund
As discussed above, having an immediate safety net is essential. Building a fund covering 3 to 6 months of expenses will shelter you from even the most extreme or expensive emergencies. The range depends on your household size, how much of your income you need and the number of income earners in your home.
With the most important dollars assigned, focus on goals in your near future. This could include your next vacation, a new car purchase or a down payment on a future home. These goals will be specific to you, so do not worry if your list looks different than someone else’s. Once again, personal finance is supposed to be personal.
This priority list is a rough guideline for working financial triage into your life. Stop and re-assess periodically. If an unexpected expense wipes out your emergency fund — you may need to change where your next dollar is going. No priority list works if you do not know where you are headed. Before taking the money for coffee and putting it into an IRA, take a step back.
List your financial goals. Do you want to have kids? Do they need college or wedding funding? What do you want retirement to look like? How many vacations do you want to take? Prioritize your goals and start applying financial triage. It will help you maximize each dollar and build a worry-free financial future.
Kristen Ahlenius, AFC
Kristen Ahlenius is an Accredited Financial Counselor® with a Bachelor of Science in Financial Counseling & Planning. As the Director of Education at Your Money Line, she aims to impact financial lives and improve money behavior for generations. Kristen is pursuing of a master’s degree focused on Financial Therapy which allows her to better understand the “why” behind financial decision-making.
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