Setting and Tracking Financial Goals

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WHAT I’M THINKING ABOUT: YOUR FINANCIAL GOALS

You’ve probably heard that writing down your goals makes it more likely you’ll achieve them. A recent study even concluded that writing down your goals on a regular basis ups the success rate by 42% — sounds overly precise, but we’ll take the sentiment.

When it comes to financial goals, though, we can do more than just write them down.  Because they ultimately boil down to hard numbers, we can track our financial goals and measure our progress.  As Peter Drucker, dubbed the “founder of modern management,” observed: "If you can't measure it, you can't improve it."  

But before we get there (and give you our handy goal-tracking spreadsheet — that’s at the end!), we’ll walk you through your top priorities in setting financial goals.

Your Top Three Priorities

Your financial goals should be a natural extension of your values surrounding money. Our big picture aim is to spend, save, and give wisely and in alignment with what you value most. But there are three goals that, if applicable to you, always take priority.

PRIORITY #1: PAY OFF HIGH-INTEREST DEBT.  If you have credit card or other high interest debt — anything with an interest rate above 8% or so — your goal is to pay this off as quickly as possible. Give yourself 12 months, tops. If necessary, pause other saving (including retirement savings) and cut your budget to the bone to achieve this goal.

PRIORITY #2: EMERGENCY SAVINGS.  Emergency savings provide an essential cushion in case of loss of income or emergency expenses (like a big medical bill). At a minimum, your emergency savings should cover 3 months of living expenses and minimum debt payments. (Use your actual monthly spending — few people are able to significantly scale down spending even when hard times come.) Once you have 3 months of emergency savings, it’s usually a good idea to increase to 6 months of emergency savings, particularly if you’re facing financial uncertainty (such as if you are a business owner, a freelancer, family dependent on a single income, or in an unstable industry).

PRIORITY #3: RETIREMENT.  As a rule of thumb, I recommend saving a minimum of 10% of pre-tax income towards retirement. (Often 15% is a more appropriate savings rate, especially if you’ve been working for awhile and have yet to start saving for retirement.) Saving for retirement is less about building up cash for a life of leisure and more about preparing for future needs, especially in light of longer life expectancy, the cost of healthcare, uncertainty of Social Security, and the decline of pensions.

Why is saving for retirement a higher priority than more imminent goals?  Prioritizing retirement ahead of earlier goals like college savings might sound counterintuitive, but compare the two seasons of life (your child starting college versus your retirement). What happens if you reach retirement with insufficient savings, or 15 years into retirement you run out of money? Your options for increasing your income at that point are limited, and the burden of that shortfall may land on your children. By comparison, if by the time your child begins college you don’t have enough saved, you have several manageable and appropriate options: financial aid, loans, delaying retirement, increasing your income, a nonworking spouse returning to work, trimming your lifestyle. In short, it’s harder to respond to shortfalls in your income or savings at a later age, so don’t cut corners on retirement savings. (And, of course, saving for retirement comes with juicy tax incentives.)

Beyond the Big Three Goals

After those top three priorities, your goals become much more dependent on your circumstances, values, and dreams. Here are the most common goals I see among my clients.

Home Purchase: I recommend a traditional 20% down payment, almost always. Set a savings target of 23-25% of the value of the home you’re aiming to purchase to account for closing costs, fees, and wiggle room. Most importantly, do not drain your emergency or retirement savings to purchase a house. After your home purchase, be sure to recalculate and increase your emergency savings to account for additional expenses like your mortgage, insurance, and property taxes. In many places, particularly cities with high costs of living, renting is almost always the best way to start off. Don’t rush into homeownership. Renting allows your income to go to higher-priority goals and also provides flexibility as your career and family situation develop and change.

Career: Do you hope to make a career change, start a business, or take a more flexible job? Start to gather details on the costs associated with this change—start-up costs, more school—and the income changes you’re likely to see. If this change is risky, like starting your own business, you’re going to need additional cash savings (beyond your emergency savings) to give you a runway for the transition. Spending awareness and budgeting will be key in understanding what’s possible and when you can afford to make a change.

College Savings: Saving for college does not become higher-priority until you have a baby. Nevertheless, if you hope to have children, then it’s wise to live well below your means today and save the extra income. That’ll make it easier to transition to the increased expenses and savings goals that come with having children. (You can find our articles on saving for college, such as through 529 accounts, here.)

Lifestyle/Travel: Consider what experiences are important to you — travel, hobbies, cultural events. Decide how often is realistic (for example, one overseas vacation every two years). Get specific and calculate how much you need to set aside each month to make these goals a reality.

Giving: If you want to make charitable giving a routine part of your life, then be proactive and plan for it. Giving should be a joyful experience. Creating goals around giving and budgeting your giving often creates more joy and satisfaction, even when your standard of living takes a hit because of your generosity. Knowing how much you get to spend on giving each year creates a lot of freedom! If you aren’t giving but want to and don’t know where to start, commit to giving regularly at the beginning of the month in a small way. If you do it at the beginning of the month, your spending the rest of the month will be forced to respond accordingly. Give yourself the feeling of small wins with a small and frequent amount of giving and slowly increase the amount until you’re at your desired goal for giving.

Tracking Your Financial Goals

If you want to get serious about achieving your financial goals, you need to roll up your sleeves and track them. Fortunately for you, we put together a handy spreadsheet you can use.

For each financial goal:

  1. Insert the current amount you have saved (or, for debt, the current amount owed).

  2. Insert the final amount you want to hit for each goal.

  3. Insert a target time frame for achieving that goal.

  4. Calculate the monthly or annual amount you’ll need to save to achieve to achieve the goal within the target time frame.  You’ll need to cross-check those monthly or annual amounts with your budget (or saving and spending history) to determine what’s realistic and where adjustments (either to your budget or your goals) are needed.

Revisit your goal-tracking spreadsheet at least annually, and make adjustments as needed. Working toward your financial goals is a dynamic process, but for now keep in mind that the most important step is to get started.


What I’m Reading

Workism Is Making Americans Miserable
By Derek Thompson, The Atlantic

On the heels of last-month’s article on How Millennials Became the Burnout Generation, this is another must-read piece on how college-educated professionals are looking to their work for purpose and identity—what Thompson calls “workism”—and are instead finding disappointment and anxiety.

But our desks were never meant to be our altars. The modern labor force evolved to serve the needs of consumers and capitalists, not to satisfy tens of millions of people seeking transcendence at the office. It’s hard to self-actualize on the job if you’re a cashier—one of the most common occupations in the U.S.—and even the best white-collar roles have long periods of stasis, boredom, or busywork. This mismatch between expectations and reality is a recipe for severe disappointment, if not outright misery ….

Wealthy, Successful & Miserable
By Charles Duhigg, The New York Times Magazine

In a similar vein, this article recounts the author’s 15-year reunion at Harvard Business School, where he was shocked to find his elite classmates largely disappointed (and even miserable) in their careers.  The cause?

Based on my own conversations with classmates and the research I began reviewing, the answer comes down to oppressive hours, political infighting, increased competition sparked by globalization, an “always-on culture” bred by the internet — but also something that’s hard for these professionals to put their finger on, an underlying sense that their work isn’t worth the grueling effort they’re putting into it.

Both of these articles raise tough questions about our work and the money it produces. They’re a good reminder to see both our work and money in the context of our larger life values — in other words, more money isn’t always better, nor is higher-paying work always better. Stop and ask the why of your money and your work, and have the courage to align them with your values.

If you’re ready for financial guidance, accountability, and an action plan, check out our one-on-one services or online courses.