Greg Reid once said, “A dream written down with a DATE becomes a goal. A goal broken down into STEPS become a plan. A plan backed by ACTION makes your dreams come true.”
When I wrote about planning for success after graduation, my first step aimed at making a plan. Within this plan you have goals that are worked towards to achieve your dreams. Being a competitive swimmer for 13 years I would have gotten nowhere if I did not have goals. They kept me focused and motivated to reach the end despite the struggles I faced inbetween.
Financial planning is not possible without goals and today I will share a story that happened recently to show the power of goal setting and how they can make you financially stable.
To give you some background information, the area surrounding my university is a blue collar neighborhood. As I have done community service in the area, I know that many families live from paycheck to paycheck, like 70% of Americans. But is everybody within this community living this lifestyle? After my latest encounter I am not so sure. The person I will describe lives in this neighborhood and is a single mother. I know nothing of her financial situation but she gave an inspirational story.
It was lunch time on a Sunday evening and I was hungry so I decided to go and get food from a local Italian eatery near university. Upon ordering my food I saw that one of the cashiers had a smart watch on her hand. When I looked closer I was shocked to see that it was the Apple iWatch! In my head I questioned why would she buy such an expensive item?
Having known this person for 5 years I said, “That is a really nice watch you have there, isn’t it the Apple smart watch?” She told me that it was and we had a small conversation of how it works and whether she liked it or not. During the conversation I told her that it was too expensive for me to afford and was not sure if it was worth all that money. She laughed and told me that it was really expensive but she had been saving to buy something nice for months and figured this would be a good purchase.
To cut the story short she said that growing up in this neighborhood she never had any luxury items but always saw them being advertised on television or by some of the higher income college students on campus. She slowly put money aside each month to buy a “luxury” item and figured the iWatch was the one she wanted.
Now I am not sure if she saved her money in a bank account, through investing, or just stuffed it into an envelope under her bed. These questions were too personal to ask but no matter her choice of method, she set a goal and put money aside until she achieved it.
Yes she probably could have put her money to better use. However, it is important to remember what is special for some people are not important for others. The moral of this story is that you can achieve your goals through conservative spending habits. Whether your goal be purchasing a new house, a new car, or saving for retirement, they will all be marathons and not sprints.
However, there is one question I have with this story. I ask myself, “Did she fell into the typical consumerism trap?” Companies are promoting their products with marketing strategies that target certain emotions within our body to entice us to buying their products. If you fall into their trap you will likely be an impulse buyer which will blow your budget. Unfortunately for the lady in my story, I think she fell into the trap of consumerism which led to her spending enormous amounts of money on a piece of technology that may likely become obsolete in the coming years.
Below are some strategies to help you achieve your goals:
Set your goals into three buckets: short, medium, and long-term.
Short-term: These goals should be 1 year long. An example is a vacation. A flight to Trinidad will cost me $800 so I will need to save roughly $67 a month, before taxes, to afford this trip once a year. Appropriate saving vehicles for these goals are saving accounts (preferably high yield), CDs or a money market account. It is important to know that while money market accounts can offer higher interest rates than saving accounts they often have higher minimum balance requirements. Also, with a CD your money is tied up for a period of time and if you withdraw your money early you will likely incur a penalty. The goal is to reduce risk and conserve capital.
Medium-term: These goals take longer than a year to achieve but usually no more than three. Examples include purchasing a car, paying for a wedding, or making a down payment on a house. You can still use a saving account, CD or a money market account for these goals as you are trying to reduce risk and conserve capital. However, I would suggest including part of the fund money in an index fund to accrue wealth quicker.
Long-term: The most common example is retirement. Retirement accounts should be invested into the market, yes millennials I know this is scary, as the length of time should eclipse the volatility in the markets. Some ways to fund your retirement account include a 401(k), a Traditional IRA and a Roth IRA. Take full advantage of your employer match for the 401(k) as it is essentially free money. One major difference between a Traditional IRA and a Roth IRA is when your money is taxed. There is a no right or wrong method so choose what suits you.
Other related points:
In order to achieve any of these goals you should have them written down and factored into your budget. If you want to learn how to create a budget you can check out this article. You should also have an emergency fund set up before pursuing goals to ensure you are prepared for any curve balls life may throw at you. These are typically 3-6 months of your salary.
What are some goals you have set? Do you think the saving methods mentioned above are appropriate for goal setting? What other ways do you save for goals?
There will be no post this Wednesday as my CPA exam is in 10 days so I will be studying. See you all Sunday.