Financial Planning for The New Year: How to Reach Your Goals
A few weeks ago, we talked about financial planning as we head into the new year, and specifically how to set your financial goals. Hopefully, you took note and made some SMART goals (see Financial Planning for The New Year) and now it’s time we discussed how to reach those goals by implementing the necessary steps. It should be no secret that the key to reaching your financial goals is largely based around your habits, namely, how you spend, save, and how you keep track of your income and wealth in general. Good habits often beget favorable results, and the way to replace bad habits is with good habits.
Since money is something we rely on every day of our lives, few of us stop to think how and where we actually use it. It’s extremely easy to lose track of something we do daily – spending – to the extent that we almost assume our financial habits are reasonably sound in that if we haven’t wound up broke and homeless, most of us tend to assume that what we’re doing works, if only in the sense that it’s adequate. Adequate, though, is not the same thing as excellent, and smart financial planning requires excellence and, most importantly, diligence and discipline. Most of us have a vague idea of where our money goes, but in general most people have only the barest sense of how their spending habits affect their long-term wellbeing, so the first step to attaining your financial goals is to have a clear picture of your spending habits.
If you paid attention to our last blog on this topic, by this point you’ve determined your net worth, set specific goals, and established a time frame. We touched on this before, but now is the time to fearlessly track your expenses over time and spending habits. Don’t worry, we’re not here to tell you to change anything just yet; what’s important at the moment is that you begin to write down what you spend, where you spend it, what you spend it on, and when those expenditures take place. This may sound redundant, but revisiting your notes at the end of each month to get a clear picture is incredibly important. Otherwise, what’s the point of taking account of your expenditures? It’s also crucial to take a look at your monthly budget as it relates to your financial goals. In other words, examine your balancesheet within the context of your overall financial plan while keeping in mind your long-term and short-term goals.
This is not an overnight project. After all, we’re talking about your future and that of your family as well. You should plan on spending at least one fiscal quarter keeping track of your monthly expenditures that are both regular (mortgage, car payments, food, etc) and those that are unplanned (car repairs, unforeseen medical expenses, and the like). This is to give you a clear picture of what to expect under normal conditions AND what to expect given the unexpected. Remember, preparedness is the difference between a bump in the road and an emergency.
This brings us to your time frame, which is a large part of your short-term and long-term goals. Where do you want to be a year, five years, ten years, and twenty years from now, and what exactly do you hope to accomplish? An ultimate goal of, say, increasing your investment portfolio to $500,000 and having your mortgage paid off in twenty years is going to require smaller steps to get there. In other words, what you do over the course of this year and over the next five years will greatly affect where you are in twenty. How much do you need to set aside to make these goals happen, and what habits do you need to practice in order to achieve that? You need to be able to see your goals according to various time frames, whether it means tracking your expenses for three months and adjusting your budget to accommodate your goals or choosing where and how to invest over five or ten years in order to meet a given target.
So after a few months, given your expenditures and spending habits, what can you change in order to move your income towards reaching your goals? Can you use coupons and buy off-brand food to save a few hundred each month to put into savings? Can you combine trips to save gas and use the windfall to set aside funds for your children’s college education? How much do you need to set aside to make your goals a reality, and what does it mean for your monthly budget? Are there things you can do without, or are there ways to make the most of your money and save extra? It’s not all about giving up vices or guilty pleasures; sometimes efficiency ends up saving a little at a time, and even small amounts add up over the long run.
Often, we’re asked what a good budget looks like, but because everyone’s goals and circumstances are different, there’s no real one-size-fits-all approach. While we suggest that everyone set aside 10% of his or her yearly income for savings, this is easier for the salaried worker than the independent contractor or business owner with a seasonal trade and so everyone will have to adjust their budget according to their own unique circumstances. Priorities matter, and we all need to own them in the context of the goals we set. If, for example, you want to be a millionaire by age 50, then it may mean you don’t take an expensive vacation every year. By the same token, there’s nothing wrong with taking those vacations if that’s where your priorities lie; just take care not to deceive yourself into thinking that it’s possible to gain something without giving something up in return. All that aside, there’s one specific action that applies to everyone universally regarding his or her monthly expenses, and that’s live below your means no matter what they may be. That one simple maxim is what allows everyone, regardless of income, to save for the future and build wealth. It’s not about how much you have or how you use it; it’s about how you keep your expenses below your incoming cash flow to allow you to save for the future, invest, or prepare for emergencies.
Next week, we’ll talk about how a more detailed cash flow analysis comes into play as far as creating contingency plans and what your monthly budget should entail. You’ll be using your budget, cash flow, and expenditure notes as a model for preparing for either a surplus or a loss as well as coming up with a plan for what to do in the event of either. Financial plans are all about discipline, and the objective here isn’t just to map out a goal and a plan, but to stick to it with a clear understanding of why. Be sure to check back with us each week for tips on finance, real estate, and investment, and don’t forget to follow us on Facebook!
– Get It Right Solutions LLC