Paying off debts can be incredibly rewarding. You’re getting out of the financial hole and you’re working towards increasing your cash flow. What can be better financially?

Understanding and setting financial goals is important with personal finances. While there are certainly some popular advice out there, you have to decide for yourself what will work. it may be different than what you think.

Prioritizing Where Your Money Goes

Let’s say you’re pumped and  ready to build your net worth as soon as possible. You’re gone through plenty of personal finance sites and saw how debt reduction is the key to getting your finances squared away.  Perhaps you’ve read total Money Makeover by Dave Ramsey and you’ve decided to have that gazelle intensity and you’ll completely pay off everything as fast as possible.

Let’s say for example that you’ve eliminated a few debts and have enjoyed the wins so far. Now you have only have one credit card you owe on, a car loan with a few years left, and your student loan. You may think that just throwing money at all of them would be the best plan. After all, you’ve established that debt reduction is your #1 priority.

Treating your student loans, like your other debts might not be the best financial decision in this case. You have to weigh your options.

Not All Debts are Created Equal

Before you aggressively pay down your student loans, I’d make sure you have the following in place:

  • At least 2 months of savings for emergencies: If you have dependents counting on you, you may want to increase to a more conservative level.
  • All your higher interest debts paid off: Student loans typically have lower interest rates than credit card debt and some car loans.
  • You’re contributing to your retirement fund: Some people may disagree with investing while you’re in five figure debt with student loans, but looking at compound interest, it can pay off.

Instead of just having blind gazelle intensity, I think your money would be better served being channeled to above goals.

Depending on how you feel, you may just contribute the minimum amount to receive your employer’s 401(k) match while you pay down your student loans. Others may just pay the minimum on their student loans and invest the maximum they can.

Deciding on What Works Best for You

My guidelines for prioritizing how my income is dispersed is based on a few things. The gist of it comes down to looking at the long term benefits, both financially and otherwise.

  • It can improve monthly cash flow. If I can reduce or eliminate a recurring monthly expense, then I’ll look into paying it off sooner.
  • Reducing the debt can give some peace of mind. While having the numbers to back up a goal is wonderful, I know that sometimes it’s not just about the numbers. If we can sleep easier with one less bill, then paying it off sooner can be beneficial.

Everyone has their own criteria on how they want to accomplish their goals. Defining your own guidelines can increase your success rate.

Handling Financial Goals

What are your financial goals? How have you’ve been doing so far?