Photo by Markus Winkler on Unsplash

As a follow up to my last blog about setting financial goals, I wanted to address a little more specifically how to choose your goals, and also the importance of giving direction to your money. This isn’t limited to New Year’s – we should always have a sense of our top few priorities. And we should know in advance what we’re going to do with extra money when it comes our way.

By “extra money” I usually mean things like tax refunds, or a 3rd paycheck, but recently we’ve had a few new ones. Those stimulus payments were the perfect example of extra money. Making a plan ahead of time would have been a really good idea. But for the past six months many families have also gotten an advance on their child tax credit. For parents of two children who qualified, that probably meant an extra $500 in the door halfway through every month. It’s so easy to just stick the money into your checking account and feel like you have a little breathing room, but within a few months that money is gone and you have no idea how – it’s somehow passively dissipated into the air. Of course, bonuses and inheritances also fall into this windfall category. It’s any money that’s beyond your normal monthly income.

Making a plan in advance means that you’re considering everything you might be able to do with that money, and deliberately making a decision. The first step is to write a list of all possible uses for that money, and then winnow it down to the most important 2-3 items on that list. Here are the most typical uses I see (in order of importance):
• Setting up or increasing an emergency fund
• Paying down high interest debt (over 10% interest), such as credit cards
• Putting more money into retirement (especially if you’re not maxing out the employer match)
• Paying down debt with a 4-9% interest rate – often student loans or personal loans
• Increasing college savings – especially if you get a tax break or a matching contribution
• Increasing your budget for the month for something fun – concert tickets, or going out to eat, or taking the family on a weekend trip
• Saving for travel or other fun goals
• Paying down low-interest debt (auto loans or mortgage)

Pick two or three items, and figure out how you want to split any extra money. You don’t have to overthink it – an even split between your top priorities is an easy place to start.