Goal Setting Can Improve Your Financial Future & That of Your Family's
Successful “goal setting”—whether immediate, short, intermediate or long term—begins inside your mind.
You (and/or your planner) must consciously put together a solid plan that will help you reach or exceed your goals.
Because “goal setting” is a process it requires a mental planning stage on your part and a written plan thereafter—for the plan to be the most effective.
Most importantly you must consider the time
horizon, therefore you must consider the time value of money (the amount of
money you have today is worth more than the same amount of money at a later
Also in order for the goals to be measurable you should have a specific goal(s) or objective(s) in mind and a certain date that you plan on meeting your objectives!
Successful “goal setting” is a requirement if you truly want to reach your goals. You must be as specific and detailed as possible when setting your goals.
You must be as specific as possible. If you do not currently have an emergency fund—you should list specifically your written plan for establishing one and the time frame needed to establish it.
Do not dream or speculate.
You should have a detailed plan of how you will
save—weekly, monthly or otherwise—until you reach your 6 month emergency
savings target or whatever target you have in mind.
By properly formulating and utilizing goal setting strategies you can more effectively manage your future financial risks!
You cannot utilize escapism or other means of looking at your situation!
You must look at your situation in a fully engaged manner so that you can devise a plan that will effectively help you reach the goals that you desire for yourself and your family!
Establishing and properly maintaining an emergency fund of 6 months or more is at the foundation of you managing your financial risks and that of your family's.
Say you (age 42) make $40,000 and your spouse (age 38) makes $20,000 annually working part time—kids are now in school all day and spouse found a job from 9-3pm—your 2 kids are age 5 and 7.
You currently have adequate life insurance of
$600,000 (you use your tax refund of about $900 to pay your policies every
March which are now $520 annually—$400,000 coverage on husband and $200,000 coverage
You are currently renting a 3 bedroom apartment at $1,000 (renter’s insurance included in payment) per month in a strong school district.
You have one vehicle with a monthly payment of $300 and $50 monthly comprehensive auto insurance and the household utilities are $300.
You and your family are insured health wise with employer provided coverage. Your monthly food and miscellaneous purchases and expenses are $800.
You put $250 per month (pre-tax) in your employer provided 401K which has a 4% match.
You have outstanding credit card debt of $12,000 with a minimum monthly payment of $150.
Your monthly take home pay is $4,250 and your
monthly household expenses are $2,600 which would give you $1,650 in
How would you approach your situation if your goal(s) were to pay off your credit cards, establish a 6 month emergency fund, save for a down payment for a home, fund your 2 kids college education and save for retirement?
For maximum effectiveness you must have a written plan that states in definite terms how you will pay off:
1) your car note
2) credit cards
3) save for the emergency fund, and
4) save for home purchase down payment
For example—continued payments of $300 per month will pay off your car note in 24 months.
$240 a week for 52 weeks would pay off your credit cards in 4 years, or $1,000 a month for 12 months would give you $12,000 which would pay off your credit cards in 1 year.
As for the emergency fund, you are considering whether you will save $200 a month for 48 months or $800 a month for 12 months—which would give you $9,600 which would be your emergency fund.
You ultimately decide that you would like to create an emergency fund in the next 18 months—so you decide to use the following strategy.
Your 6 month emergency fund which you put $200 in monthly over the last 12 months will have a $2,400 balance after 1 year.
You decide to increase your emergency fund payments to $1,200 per month ($200 current payment plus $1,000 monthly credit card payment that has now ended due to payoff) and in 6 more months you will have a 6 month emergency fund balance of $9,600 ($2,400 plus $7,200) after a total of 18 months.
As for the down payment for the house you decide to save $50 per month for 18 months—which would give you $9,000 after 18 months.
At this time your credit cards which you had been paying $1,000 per month on will be paid off.
In addition, the $1,200 per month that you had been paying for the last 6 months to establish your emergency fund would be properly funded.
You then decide that you would increase your down payment savings to $1,500 per month and would have $36,000 saved—plus the $9,000 already saved—which would put your total over $40,000 ($45,000 actually) in savings for the home down payment.
As for the funding of the kids education you decide to begin in 2 years paying $150 into your kids 529 college saving plans ($300 per month that was initially going to the car note).
Three years from now you decide to increase the monthly saving to $220 per child for the next twelve years.
This will give you the targeted amount you need assuming current educational and inflation factors remain constant or relatively constant.
By having a written plan you will know that all of your credit card debt will be paid off by xxxx date if you pay $1,000 per month for 12 months.
You now know that you have 24 months left on your car payment of $300 per month. When that is paid off you decide you will not purchase a car for at least three years and put that monthly payment of $300 on your children’s 529 college savings plan.
You and your wife agree to use the $1,000 credit card payment and the $500 that you are currently saving for your home down payment into your home down payment savings plan.
Also, be aware that the use of "you" and "your" in this discussion means "you and your spouse" and possibly other family members.
By feeling confident about your financial future you are now in great position to purchase your home.
You purchase your home in three years for $200,000 and you put $40,000 down as a down payment.
You found a great deal in a great neighborhood and school district and because you put 20% down you have no PMI (Private Mortgage Insurance) included in your monthly housing payment.
With absolutely no debt (credit card and car note paid off in 24 months) and a properly established emergency fund along with 20% of your down payment—you should now feel comfortable purchasing a home in a nice neighborhood!
You should now feel much better equipped for home ownership since you have:
Will the plan have to be possibly altered?
Possibly, life can be unpredictable—a sudden job loss, a major sickness, a natural disaster and many other factors could occur that would make you have to possibly alter your plans.
By outlining and following the plan that you (and/or your planner) initially mentally formulated and you had the strong desire to put in writing—and because you had a strong determination to follow the plan after several years you should be able to reach your stated goals and objectives even if adversity or unexpected happenings occur.
Minimal Mental Checklist of what you should ask yourself about your financial situation.
Some thoughts that should go through your
mind(s) as you consider various areas of your finances. The thoughts are not
intended to be exhaustive—only a small sampling.
As far as insurance we currently have renter’s insurance, life insurance of $600,000, ($400,000 for myself and $200,000 for my wife). We have looked at various homeowner policies and have selected one that adequately protects and covers our home and assets.
We have considered an umbrella policy (policy that provides additional liability coverage on top of what you normally have on your homeowner and auto policies) and have decided that it is appropriate for us.
We have decided to purchase a policy within 1 year because we realize it is a cost effective (several hundred dollars a year) way to protect our assets and income and will help protect our net worth.
We have looked at and seriously considered disability insurance and have decided that it is appropriate for us and we plan on purchasing a policy with the next pay raises that we get.
We know the yearly totals in premiums that we will have to pay for every year on our term life insurance policies.
Based on the figures outlined in our policy we have accounted for all future increases and we can make the payments based on our current income for the next 10 or 20 years (time left on policies).
We have considered our Long-Term-Care (LTC) needs and have determined that we have no need for it at this time.
However we will re-analyze our need for LTC insurance in our early and late 50's. We should not have a need for LTC insurance if our investments and retirement accounts net us 3 million plus in today's dollars.
However we realize that life changes, emergencies and the like can change our expected returns, therefore we will revisit the need for LTC insurance in 10 years and every other year thereafter.
If our expected returns are not on track we will consider purchasing at that time.
We have full coverage insurance on our auto, and we understand what is covered under our policy.
We have determined that our health coverage for
our family is adequate at this time and we have planned for the possible
increase in premiums in the future.
As for retirement I will contribute 4% to my 401k which has a match up to 4%, and also fund a ROTH IRA of up to $5,000 (one for my wife and one for me).
We choose not to invest outside of retirement
other than our home purchase at this time, but will consider it in the
We have considered various home purchase options from an 80/20 piggyback with a Home Equity Line to Down Payment Programs with little or no down payment, to FHA loans, to HUD Homes with little or no down payment and we have come to the conclusion that we prefer to have a true equity position in our home and we decided to put 20% down.
We have done extensive research on the schools, the neighborhood, the government structure and the surrounding areas and found that homes tend to hold value pretty good in this area.
We have selected a real estate agent who is familiar with the area and truly looks out for our best interest.
However, we also realize that past performance is no guarantee of increased appreciation, but all in all we like the home we are about to select and purchase.
Furthermore, as for taxes we will review our with-holdings and consider increasing our take home pay by receiving an extra $40 per month instead of receiving a $$900 income tax refund every year.
We would receive a smaller refund but we don't know if we want to make the change at this time.
Our refund would then only be $300-$700 depending on the tax changes etc.
However, we are leaning towards keeping our w-4 with-holdings where they are because we like the idea of paying our life insurance every year with our tax refund.
Besides the small amount of interest lost by getting our money earlier (monthly) is not a great appeal for us.
My tax professional told us that we would possibly get an additional $1,000 (possibly $1,900 total) after the purchase of our home and we would be able to deduct the points, interest and property taxes.
When we actually see the additional $1,000 on our next tax return we'll probably decide to change the withholding some—but not at this time.
In addition, we realize that we must timely file for the homeowner "homestead exemption" (before March 1st in our County) to help reduce our property taxes some.
As for education planning for my 2 kids we will start that in 24 months using the same amount that we paid on my car note ($150 per child or $300 monthly) for the next 2 years and ($220 per child or $440 monthly for the next 12 years).
We know that it should give us (?) and it will give us (?) amount of dollars for each child inflation adjusted to meet the college costs of my 2 kids. At the same time we will encourage them to be active and excel and pursue scholarships if at all available….
As for our Estate Planning and Wills we will go visit an attorney and/or go online and utilize a reputable company to create a will for my wife and myself.
At this time we don’t feel we have a large enough estate to see an Attorney for Estate Planning as our retirement account and New Worth is quite low at this time.
We will stay abreast of "life changes" (marriages, divorces, births, deaths etc.) in our family and will modify our will if necessary in order to not invalidate our will.
We are aware of how our state laws affect the outcome of our will(s) if we were to transition unexpectedly.
As a married couple we know what is included in each others will and we will do our best to honor each others wishes that are stated in the will should one of us pass before the other.
As for retirement I will contribute 4% to my 401k which has a match up to 4%, and also fund a ROTH IRA of up to $5,000 or the yearly maximum (one for my wife and one for me—for a total of $10,000 or the yearly maximum—on an annual basis).
Assuming we both retire at age 62 and assuming a 6% return and 3% inflation—we realize that we will be able to live at our current level (or higher)—well into our 90's.
Other Helpful Financial Tips
In the above scenario the home purchaser's would have a housing debt ratio after purchase of 31% ($1,300/$4,250). The housing and debt ratio would also be 31% because they have no debt.
Increases in pay and inflation/deflation must always be taken into consideration.
Increases (pay raise) in income would decrease the housing ratios.
Decreases (job loss) would increase the housing ratios.
The lower the ratio the better—as they represent the monthly portion of your income that is being paid on your housing and other debt.
Debt in excess of 1 year (such as credit cards, car payments, student loans etc.) will be included in the housing and debt vs income ratio.
The housing ratio is also known as the front end ratio. The rationale is that this ratio is done first—or on the front end.
The housing and debt ratio is also known as the back end ratio. The rationale is that this ratio is done second (last)—or on the back end.
Discretionary income is income left over after you have paid all mandatory expenses and is money that you can spend or save any way you like.
Automated Transfer or other means to force you to save should also be considered.
It helps reduce the risk that you will be tempted by “unneeded wants” by not seeing or having access to the cash.
Don’t forget about vacations and having fun.
Try to make enough money so that you can do your needed financial planning and also enjoy life—for you and your family!
Memories are precious and you are here on this earth to enjoy as much of it as you can as long as you do it responsibly.
Cross off each of the above steps when they are reached, get the family involved if you want to!
Do it on a weekly or monthly
basis—whatever motivates you, but be sure to do it!
It is you who must get the ball rolling if you want to permanently improve the living conditions for yourself and your family!
Also, consider using some of your discretionary income to save for vacations and family outings, increasing your emergency fund and the like.
Keep your emergency fund in highly liquid assets such as a money market fund or other similar low risk accounts.
You must visualize yourself doing that which you agreed to on paper for the time period that you agreed to on paper—to reach your desired goals.
In short, you must visualize by mentally seeing it happen, do what you visually see happening and it will happen.
You must not only have the financial means to make it happen—you must also have the mental, physical, and spiritual strength to make it happen.
You cannot hope that your financial plan will work—you must realize that you will have to do all that you can to "make it work" by following the written plan that you and/or your financial planner created.
Goal setting and actual execution can often be a difficult and painstaking process for some, however the rewards are not measurable.
Once you start to enjoy the success of financial achievement that you helped create life seems to start to fall in your favor and future success in all areas of your life seem to happen as a matter of course!
Plan your future wisely and use "goal setting" as a major tool—not only for yourself but also for your family and future generations yet unborn.
One last key goal that you should aim for:
Remember that "Life" will always have the unexpected!
Be sure that you have a properly funded emergency fund, you don’t carry any meaningful debt other than your house payment and you live beneath your means!
By doing so you will—or should be ready for any economic and political environment.