This post is from staff writer April Dykman.

Quick — can you list your top financial priorities?

My top priorities (aside from basic living expenses) are building a house and travel. Those are the two things I daydream about the most, and the two things I try to keep in mind when I’m deciding whether I really need all 10 “hard-to-find” books from the used book store or whether I’m overspending on, say, a $100-compost bin, when there’s a cheaper alternative (<—My husband and I built one of those this weekend!).

When we were paying off debt, however, we had a different set of priorities. After the bare necessities, there was paying off the credit cards, then paying off the car, and finally a fully-funded emergency fund. (As I’ve mentioned before, we didn’t start with the mini-emergency fund, which is the best way to go — we were still learning about money and fumbling our way through debt repayment.)

Recently I realized that establishing financial priorities — really defining them and creating ways to keep them in the forefront — is what got us out of debt and has helped us to save up for extras like vacations and building a house. There’s no point in scrimping and saving if you don’t know what you want to do with the money — whether it’s a cushy retirement, owning your home free-and-clear, helping your kids pay for college, or traveling to Barcelona.

Defining priorities improves chances of success
Your priorities are your own, but defining them for yourself and your family is likely to increase your odds of success, especially if you tie them in with big-picture goals. A study on spending habits and goals found that keeping the big-picture reasons in mind improves your chances of achieving your goals. From The Journal of Consumer Research:

People become more close-minded when they focus on logistics, and less likely to take advantage of unexpected ways they can move closer to their goals. But people who focused on the abstract reasons were able to spontaneously take advantage of ways to turn their dreams into reality.

Planning is important, no doubt. You can’t daydream about a trip to Spain for months without taking the smaller, concrete steps to save the money for the trip. But the study found that to turbo-boost your planning, you have to think abstractly, keep an open mind, and remind yourself of why you are working toward the goal. So, what are your priorities?

Define your financial priorities
If you’ve never laid out a plan of how you want your money to work for you, it’s time to change that! I advocate making them concrete with paper and pen (of course a computer document is fine, too).

Let’s say you are in the zeroth stage of personal finance. You don’t have any savings, you live paycheck-to-paycheck, and you’re just becoming aware that this lifestyle can’t continue without dire consequences. Maybe you want to buy a house, but saving a down-payment seems impossible. First, you have to address your debt and spending habits. Your priorities might look like the following:

Big picture goal: Buying a house

  • Priority one: Rent or mortgage payments, taxes, insurance premiums, groceries, and utilities
  • Priority two: Car loan, emergency fund
  • Priority three: Credit cards, medical bills

This isn’t to imply that priority three expenses like credit card debt aren’t important, but if you’re behind on rent, your top priority is to call your landlord and get caught up on payments (and look for a cheaper place to live, if possible).

If you are in the third stage of personal finance, you’ll have a different set of priorities. You don’t worry about basic living expenses anymore because you’ve paid off debt, saved an emergency fund, and live well-within your means. At this stage, your priorities might look like this:

Big picture goal: A trip to Spain

  • Priority one: Saving for retirement, taxes
  • Priority two: Paying off the mortgage
  • Priority three: Vacation savings

I had the hardest time defining my own goals between stages two and three. Like J.D., I paid off my debt, saved an emergency fund, and then wondered, “what’s next?” My husband and I stashed the money that once went toward debt repayment and emergency savings in an online high-interest savings account. We weren’t sure what else to do!

When I read about opening subaccounts at ING Direct, the idea resonated with me. I wrote out a list of priorities, created a subaccount for each one, and gave them designated percentages based on importance. For example, saving for a house might get 20% of the money saved after we’d paid for living expenses and other obligations.

Reevaluate and reestablish
Personal finance goals will change many times as you enter different stages in life, and not just different personal finance stages. Times to reevaluate your priorities might include the following life changes:

  • Going back to school
  • Moving
  • Getting married
  • Getting divorced
  • Having a child
  • Having a second child
  • Losing a job
  • Getting a promotion
  • Changing careers
  • Starting a business
  • Sending kids to college
  • Caring for an elderly relative
  • Retiring

Until writing this article, I hadn’t always considered how many changes warrant a review of our financial goals. My husband went back to school a year ago, for example, and that would have been a good time to reevaluate, but we didn’t think about doing it. It’s a good way to buy yourself some peace of mind, though. No matter what life throws at you, reestablishing your goals will give you a financial road map to follow. 

Ready to get started? Nonprofit credit counseling agency Money Management International is providing a free financial goals worksheet (scroll down) as a part of Financial Literacy Month. You can use it to plan for short-, mid-, and long-term goals, including cost estimates and target dates. After you’ve filled it out, print it and write your big-picture goals at the top of the page (to take advantage of thinking in the abstract). Revise as needed!

This article is about Basics, Choices, Planning