Friday, November 18, 2005

My Financial Goals

After reading a dozen Financial websites and blogs, and reading four financial books, The Total Money Makeover, Financial Peace Revisited, The Automatic Millionaire, and Cheapskate Monthly Money Makeover, I've got my goals in order. I follow these goals in order, completing one before I move on to the next one (at least, that's the plan).

Goal #1: Create Freedom/Smart Accounts

SHORT-TERM GOAL: Save the minimum amount needed to pay irregular bills

LONG-TERM GOAL: Increase savings to upgrade coverage and provide a cushion

Mary Hunt suggests what she calls "Freedom Accounts". These are savings accounts you set up for bills you know are coming, they just aren't due on a monthly basis. For example, auto insurance is usually due every 6 months, life insurance: once a year, heating oil: once a year, auto registration and tags: once a year ... and so on.

I think these accounts make sense and since we aren't using credit cards anymore (right!?) this is the only way the money will be available to pay these bills. What I do is add up all the bills I know are coming and divide the totals by 6 or 12 (auto insurance divide by 6, car tags, divide by 12) to give me the monthly amount I need to save each month. This way, when they come due I have the money saved and wont need to use my credit card to pay them.

I don't like the term 'Freedom Account' because when I see it I always wonder, "freedom to do what?" It's just one of my quirks. I prefer the term 'Smart Account" because it's just smart to save the money when you know the bill has to be paid at some point.

Goal #2 Create an Emergency Fund


LONG-TERM GOAL: Save 6 months expenses PLUS enough to cover a typical car repair, a typical home repair, and the medical insurance deductible

Dave Ramsey suggest having at least $1000 for emergencies before attacking your debt. I think this is a good place to start.

Goal #3 Pay Off Credit Card Debt

SHORT-TERM GOAL: Pay off smallest credit card bill

LONG-TERM GOAL: Pay off all credit card debt and stop using credit cards unless total can be paid each month

I use a combination of Dave Ramsey's debt snowball and a common-sense directed, pay down the highest interest rate first approach.

I also listen to my own emotional/psychological comfort zone to accomplish this goal. If it doesn't feel good to me, I back off on what I pay down until it does. Ignoring your comfort zone when it comes to money is a sure-fire way of getting discouraged or scared, then giving up.

PAY ATTENTION TO HOW YOU FEEL ABOUT WHAT YOU ARE DOING and adjust accordingly. Paying every spare penny toward your debt may make sense, but it wont get you anywhere if you quit because you feel too deprived or scared.

Goal #4 Contribute to Retirement Account

SHORT-TERM GOAL: Contribute at least 1% to retirement.

INTERMEDIATE-TERM GOAL: Increase contributions to reach employer match

LONG-TERM GOAL: Increase contributions to 10% - 20%

Start with at least 1%, do more if you can and make it a goal to increase your contribution at least once a year.

If your employer offers a match (most employers will match some portion of your 401k contribution) contribute at least enough to get the match. If you don't have a retirement account through your employer, open a Roth IRA account and contribute at least 1% of your take-home pay.

I contribute 5% to the 401k because the match cutoff is 5% (employer matches 50% of contributions, up to 5%).

Goal #5 Save for Home Improvements

SHORT-TERM GOAL: Decide on most pressing area for improvement and begin saving

LONG-TERM GOAL: Create savings sub-accounts for all improvements

If you own a house you're going to have to make improvements and repairs. All houses will need a new roof, new flooring, fresh paint, new appliances, and maintenance at some point. Saving for these things just makes sense.