Wealth Goals and Objectives
To get to where you want to go, you first have to know where you’re going. When it comes to building wealth, goals and objectives are your destination.
Define wealth goals that are aligned with your true wants, values, and desires, and divide your goals into three categories: short, intermediate, and long-term.
Paying off debt, establishing an emergency fund, saving for a vacation or experience. Anything you want to accomplish in the next 1-2 years.
Intermediate Term Goals:
Buying a home, saving for your child's college tuition, starting a business. Anything you want to accomplish in the next 3-10 years.
Goals that are over 10 years away (retirement).
The timing of these goals is unique to you. Your retirement goal may be five years from now, and that’s fine. The categorized goals highlighted above are just a guide.
Keep in mind that your goals will change over time - life happens and people and values change. But by starting the process today, you will develop the right behaviors and habits that will allow you to make any needed adjustments.
Quantifying Goals and Objections
How much should you be saving towards each goal?
These are the easiest to quantify, and there is an order of operations - pay off credit card debt first, emergency savings second, and all other short-term savings goals last.
Paying off credit card debt
Credit card debt must be paid off as quickly as possible. If you have $5,000 in credit card debt, pick an end date (try to make it within 12 months) and save a set amount each month to meet the deadline. Do you want to pay off your balances in 10 months? Can you carve out $500 from your current expenses (eat at home more often, say no to new clothes, no more lattes)? If so, set the intention to pay off $500 each month. There will be interest accrued along the way so it will take a little longer than 10 months, but by setting the goal and charting the course, in 10 months you will be in striking distance of being credit card debt free! Credit card debt is expensive - a balance of $5,000 can cost up to $1,000 in interest each year - $1,000 that can be put to much better use. You will never regret paying off your credit card debt. Make this goal a priority.
Establishing an emergency savings fund
After paying off credit card debt, it’s time to establish an emergency savings fund, and an appropriate target is six months of living expenses. I call this my “power fund!” Unwanted life events happen without advanced notice - cars break down, companies cut jobs, and pets get sick. You can’t control the negative events that happen around you, but you can be prepared. An emergency savings fund allows you to respond to life’s negative surprises from a position of power.
Other short-term savings goals
After paying off credit card debt and establishing an emergency savings fund, you can now work on saving for fun things and experiences that are aligned with your values: vacation, “side hustle” fund, new furniture, new car, etc.
Intermediate Term Goals
The biggest difference between short and intermediate term goals is that intermediate term goals are worked on concurrently with other intermediate term goals.
Buying a home
If you’re buying a home you will need a down payment that represents 20% of the home value. Yes, there are financing options that require less, but let’s use 20%. Owning a home is expensive, and if you can’t comfortably afford a 20% down payment, you may want to reconsider buying the home. So, if you want to buy a home valued at $300,000, you’ll need a down payment of $60,000. Segregate these funds in a separate account, away from your emergency savings fund. Start this goal after you pay off credit card debt and reach your emergency savings target, but concurrently with other short, intermediate, and long-term goals.
Saving for college
Do you have young children, and do you want to pay for their higher education expenses? Start saving now through a 529 plan. A 529 plan is a tax-free education savings fund that provides exposure to various investments, including the stock market. How much will you need? Depends on the age of your child, and where they go to college. Here is a great resource to help you quantify how much you’ll need in the future, and how much to set aside today:
For most of us, our primary long-term saving’s goal is retirement. Even if you think you’ll never actually retire, this is still an important goal.
Retirement may be hard to see now but there’s a good chance a day will come when you will want to slow down, do more meaningful work, or have more control over your time. Regardless of how you define or envision retirement, a healthy financial foundation is critical to supporting your desired lifestyle. Trust that you will not regret making this a priority, your future self will thank you.
How much will you need for retirement?
It all comes down to four variables – your spending, timing, starting value, and monthly/annual contributions.
Step 1: Estimate how much you will spend annually in retirement.
It’s next to impossible to know what your expenses will look like in retirement, so just use your current annual expenses. For example, let’s assume you spend $80,000 per year.
Step 2: Determine how much an annual spend of $80,000 will be equivalent to at your desired retirement age.
What does this mean? Well, there is a silent threat to your savings and future spending called inflation. Inflation is the force that makes goods, commodities, and services more expensive in the future compared to their prices today. Inflation is the reason movie tickets no longer cost a nickel. So, what does $80,000 look like 40 years into the future? If you assume an inflation rate of 2.5%, the calculation is as follows: $80,000 X (1.025^40) = $215,000. In other words, in 40 years, annual spending of $215,000 will be equivalent to spending $80,000 today.
Step 3: Calculate how much you will need in 40 years to support $215,000 of annual expenses.
A quick and easy way is to multiply your estimated future expenses by 25: $215,000 X 25 = $5,375,000.
Step 4: Calculate how much you will need to save and invest each month to meet this goal.
Here is a useful calculator https://www.msn.com/en-us/money/tools/timevalueofmoney. Go to the monthly payment tab, enter $5,375,000 in future value, $0 in present value, 8% annual interest, compound monthly, and 40 years. In the output you will see that you need to save and invest $1,540 each month.
Sounds like a lot, but your 401(k) is a great savings vehicle to use for the bulk of your retirement savings. If your company offers a contribution match, your savings goal becomes even easier. More on this later. And, of course, the less you spend, the less you need. If you can live off of $30,000 (in today’s dollars) and want to retire in 10 years you’ll need $960,000. If you start with $0 today, you’ll need to save and invest $5,247 each month.
For easy reference, refer to the How Much Will I Need for Retirement? and How Much Do I Need to Contribute Each Month? tables below.
Using the “How Much Will I Need for Retirement?” table, estimate your annual retirement expenses (in today’s dollars), and select the number of years until retirement. Where the two meet is your retirement savings goal. For example, if you anticipate annual spending of $50,000 (in today’s dollars) and plan on retiring in 40 years, your retirement savings target is around $3.3 million. This assumes an inflation rate of 2.5%, and annual investment returns of 8% (.67% each month).
Using the “How Much Do I Need to Contribute Each Month?” table, estimate your annual retirement expenses (in today’s dollars), and select the number of years until retirement. Where the two meet is your monthly contribution goal (same inflation and return assumptions as above). For example, if you anticipate annual spending of $50,000 (in today’s dollars) and plan to retire in 40 years, you’ll need to contribute and invest around $960 each month.
Please, whatever you do, keep in mind that these are estimates. In no way will your retirement savings target be accurate. At the time of this writing there is no way to guarantee an 8% annualized return, and it’s impossible to know what inflation will be - the 2.5% inflation estimate is based on historical inflation. Investment returns and inflation going forward could be more or less. This is just a guide. Life happens so be prepared to change and adapt. But by charting a course and working towards these goals today, you will be better equipped to navigate through life’s inevitable twist and turns.
When setting goals, don’t worry about having every detail worked out. The only certainty in life is uncertainty, and every minute obsessing over the details of your life five years from now is wasting time. What was your five-year plan five years ago? What were your goals? Where did you see yourself living? What was your future job? Did it turn out exactly as planned? Probably not. You may have the intended outcome, but in no way did it work out step-by-step according to the plan.
Successful goal setting strikes the right balance of being clear, achievable, and time bound, while being flexible enough so that you’re not anchored or dependent on a particular reality, outcome, or result. The trick is to make wealth goals a part of who you are by aligning goals with your values, intentions, and actions.
If you or someone you know needs help identifying and quantifying wealth goals, please reach out.