What Are Your Financial Goals?
We know ―goal setting itself may not be exciting and fun, but it sure helps you to achieve your dreams and ambitions. From funding a vacation or home improvements, to securing a comfortable retirement or a child’s education, planning for goals is vital.
And, even if you are putting money aside, how do you know if it’s enough to meet your future needs? Take time to think about what your goals are. How much they cost, when you want them by, and what your regular everyday expenses are. In this way you’ll know exactly how much to save and for how long. Any changes to your budget depend on whether your goal is short-, mid-, or long-term.
Short-term goals are achieved in under a year and are less likely to cost much more in that time than now. This makes planning easier. Just subtract any amount you’ve already saved from the total cost. What is left to pay, simply divide by the months until the date of purchase to get your monthly savings target.
Mid-term goals are achieved within one to five years. If you are looking at closer to one year, the method used for short-term savings planning works well as prices are unlike to increase much. If longer, using a method that takes account of rising costs over time or interest due is a better guide.
- You wantto take your family for a special anniversary celebration to Disney World in four years’ time. Currently, the cost of the vacation is $2,000. Your calculation needs to allow for annual price inflation. Say it is 3% in our example. You would need a total of $2,251. That’s $251 more than the original $2,000 price tag. Using a compound interest calculator such as this one makes this exercise easy.
- You owe $11,320 in credit card debt. You want to be debt free in four years. To figure out how much to pay, you can’t just take the total debt and divide it by 48 months. You need to account for fact that you are charged interest each month on your outstanding balance. This can be done with a debt repayment calculator like this one.
Long-term goals, those achieved in more than five years, require that you estimate inflation which can substantially increase your costs over extended periods of time. Start by researching what the cost of the goal is now. Next, figure out the rate of inflation you will use. You can do research on what the inflation rate has been historically for your goal, but if you can’t find anything specific, you can use the general inflation rate (typically measured with the Consumer Price Index).
Keep in mind that the cost of your goal is the after-tax amount that you need. In many cases, the taxes that you have to pay on your savings may be minimal or nonexistent. However, if you are saving the money in a tax-deferred account, like a 401(k), or expect significant earnings from a taxable investment, then it is a good idea to figure out the pre-tax amount and use that figure when calculating how much you’ll need to save each month. Doing this will ensure that you have enough money for both your goal and the taxes on the money you saved to reach that goal. If you don’t know what your tax liability will be, you may want to seek the help of a financial planner or accountant.
You plan to buy a condo in seven years. You would like to have a down payment of 10%.
A real estate agent tells you that home values in your area typically increase about 4% a year. Based on current prices, use a compound interest calculator to tell you the down payment needed seven years from now, with inflation factored in. You then can use a “How much should I save each month?” calculator like this one to find out what you need to save starting now to afford the down payment.
How Realistic Is Your Plan?
After you set your goals and calculate savings per month needed, it’s a good idea to do a reality check. Can you really afford to save that much each month? If not, see if you can make any changes to your income and/or spending. Can you get a part-time job? Cut back on dining out? Spend less on clothing?
If you still fall short, you may have to rethink your goals. Is there a cheaper alternative available? Can you extend the timeframe? Are there any other goals that are less important that can be dropped?
Once you have a realistic goal plan, you need to determine where your savings will go. There are three main types of investment classes:
- Stocks. Historically, over long periods of time, stocks have provided the greatest return. However, there are no guarantees. One day your stock may be worth more than you paid for it, the next, less. If you need cash in 5 years and that timeframe happens to coincide with a strong stock market, great. But if you need to cash out your investment during a downturn, you may be sorely disappointed.
Great for long-term goals.
- Bonds. A bond is a loan to a company or government, with you, the bondholder, as the lender. The income you get from bonds can be variable or fixed. Your earnings from bonds may be impacted by inflation which means they fall somewhere between stocks and cash equivalents (see below) in terms of risk.
Great for mid– and long-term goals.
- Cash equivalents. Cash equivalents are assets that can be readily converted into cash, such as savings and checking accounts, certificates of deposit, money market deposit accounts, and U.S. Treasury bills. They tend to be low-risk, so there is little or no danger that you will lose the money you deposit. Your Credit Union has exceptional rates of return, and a range of excellent savings options. Check them out here.
Great for short-, mid-, or long-term goals.
Take advantage of tax-deferred accounts when they are available. For example, for retirement, use a 401(k) or 403(b) if your employer offers it, or you can set up a traditional IRA or Roth IRA on your own, and your Credit Union is happy to help you find the best option for your needs. Learn more here. If you are saving for your child’s higher education, consider a Coverdell Education Savings Account or 529 plan. All of these accounts allow your earnings to grow tax-free.
Your savings should be the first “bill” you pay each month. But what if you simply can’t put the $150 into your Hawaii vacation fund one month because your transmission blew? Consider it a temporary setback. With a little extra effort, you may be able to make it up over the next few months. Or alter your plans or goal date slightly. However, if you find yourself regularly unable to meet your savings goal, there may be deeper issues to contend with. Were you too optimistic with those overtime hours? Couldn’t give up eating out to save the extra $100 per month? Or perhaps the goal really wasn’t that important after all? Revisit your goals and budget and make adjustments so that they’re more achievable. By taking the time to set and manage financial goals, you can go from wishing to having