Which Comes First? How To Decide Between Debt, College, Retirement, Etc.

This is a classic financial planning question: "Should I save for retirement, pay off car loans, pay extra on my mortgage principal, or save for my children's college education?"

This was the question a potential client asked me recently during our Discovery Meeting.

Her young son was years away from college, she had ambitious retirement goals with an early target date, but she also had significant debt and no retirement savings yet. So, her big question was, "Where should I start?" How should I prioritize these goals?

As frustrating as the answer is: it depends (it seems like it always depends).

So, here is how I break it down for clients.

Step 1: Check Your Cash Flow

Before making any decisions, you have to know where you are. To do this you need to understand your cash flow. How much is coming in and where are the big chunks flowing to?

The two big parts I start with are savings rate and debt rate.

For savings, I recommend at least 10–20% of your gross income should go toward savings.

For example:

• $100,000 income = $10,000–$20,000 savings

• $200,000 income = $20,000–$40,000 savings

These savings can be further divided into:

• Retirement accounts

• Short-term savings

• College savings for kids

On the debt side, I recommend no more than 20-30% of your gross income is going toward total debt payments. These include mortgages, student loans, and credit cards (or other consumer debt). I recommend dividing these amounts into the following categories...

·        Mortgage

·        Student loans

·        Car loans

·        Credit cards and/or consumer debt

At this point, it is good to know how your savings and debt payments are divided but we are not interested in making adjustments. That will come later.

Step 2: Evaluate Your Retirement Readiness

Now that we have some cash flow data, the next step is to assess your retirement readiness.

We only assess your retirement goal because retirement is unique—you can't borrow money to cover living expenses once you stop working. Your kids can borrow for college, and you can finance a new car. But retirement expenses like food, clothes, and healthcare can't be financed.

In addition, retirement often falls prey to the "tyranny of the urgent". It can seem like it is in the fall off distance future (which may be true). But one day it won't be. And for most of us it takes years of planning and preparation to be ready for retirement since it is the largest financial decision you will ever make.

So, we assess your retirement readiness. To do so we need three numbers...

·        The number of years until you want to retire.

·        Your desired retirement paycheck.

·        Your current portfolio value.

With these numbers we can calculate whether or not you are on track to meet your retirement goals. And if not, what do you need to do to get on track.

Step 3: Identify Your Real Values

Armed with some objective numbers and data we next shift gears into the difficult part (also the most valuable part): understanding what are your actual values. Your values will in turn determine your goals.

There are many ways to do this (more on that below). But this is the critical step that is often overlooked. The problem with skipping this is it turns retirement into a retreat from a life you don't want. Instead of an advance into the life of your dreams.

Step 4: Do a Values Sort—Together

As I mentioned, there are many ways to determine what are your values. One method I use sometimes with clients is to ask the question...

"Imagine having this conversation 20 years from now: you're happy, content, and grateful for your financial progress. What exactly would have happened between then and now for you to feel this way?" Then as a vision begins to unfold, to press deeper into specific aspects.

Another way I have found to be incredibly valuable is the values sort. You can find instructions on this exercise by googling "values sort". I think this is especially valuable for couples. Here's an example from my wife and I...

We both value "independence", but it looks very different for each of us...

• For me, I think of independence as financial independence.

• For my wife, it means freedom to make decisions on her own.

Uncovering this difference in how my wife and I view a core value differently has given us great clarity both interpersonally and also in how we use and allocate our money.

So, here is how understanding what you value plays into allocating cash flow to meeting financial goals...

I often hear people say they want to travel more in retirement. But travel goals often hide something deeper. Maybe it's adventure, maybe family connection, or perhaps new experiences. Understanding the underlying value allows you to explore creative ways to fulfill your goals. Instead of just slogging through the next decade plus of work to finally retire.

Step 5: Align Your Goals and Numbers

Now it’s time to put it all together. We have our objective data and numbers, along with your personal values and priorities. This is where the science of financial planning meets the art of my profession.

We are balancing objective data such as...

• Emergency funds

• High-interest debt

• Retirement savings adequacy

…with subjective goals:

• Adventure

• Family connections

• Security and peace of mind

When we have both sets of data and we bring them into alignment, powerful, transformational planning occurs. When they are in conflict, you have insight into what trade-offs you're willing—or unwilling—to make.

This is True Financial Planning

Financial planning isn’t just about numbers. It’s about aligning your resources with your values. It’s messy. It requires compromise as we balance short-term needs against long-term goals. But when the process is engaged with care and thought, it can transform your financial future along with your family’s well-being.

In short, deciding between debt payoff, retirement savings, mortgage payments, and college funding isn’t straightforward—but it doesn't have to be overwhelming. First clarify your cash flow, retirement readiness, and core values. Then create a clear roadmap that guides every financial decision, big or small.

Ready for personalized guidance to align your financial life with your values? Schedule a call today, and let's start building your future together.

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