Today, we're interested in your goals for 2009.
What are you hoping to do with your personal finances in 2009?
Answer the poll below. If you have more to add, leave a comment!
You can select more than one option.
ING Direct has a great feature on their site about establishing your financial goals and how to get there.
Their three steps:
If you don't have access to an ING Direct account (get started with $25 free), here's the extended version of the plan.
Step 1 — Get it down on paper
The first step in planning a trip is to know exactly where you’re going. The same is true for your financial plans. With a specific plan, you can stop drifting along and start driving.
Step 2 — The long, medium, and short of it
As you make your list of goals, you need to think about when you will want to achieve them:
* Short-term goals (1-3 years), such as paying off debt or renovating your house
* Medium-term goals (4-10 years), such as saving enough for a down payment on a house, or building your IRA, 529 college savings plans, and other tax-deferred accounts
* Long-term goals (10+ years), such as paying for your toddler’s college education or retiring comfortably
Remember: No goal is short-, medium-, or long-term by definition. Retirement might be a long-term goal if you’re 30, but a short-term goal if you’re 65. A college education might be a long-term goal for a toddler, but a short-term one for a teenager. The more specific your time frame, the more you’ll want to make sure you have money available when you need it.
Step 3 — How much are my dreams likely to cost?
If you don’t know what each of your goals will cost, you’ll need to do a little research. Ballpark numbers are fine. For goals that are more than a few years away, inflation is worth thinking about. Historically, inflation has averaged about 3% per year. At that rate, a home renovation that costs $30,000 today will cost about $35,000 in five years and about $40,000 in ten. Getting the best rate you can for your savings can help you keep the value of your money where it should be.
Never too soon
Of all the goals you set for yourself, preparing for a comfortable and satisfying retirement should be a priority. Studies show that average US households are saving enough to replace less than 60% of their pre-retirement income during retirement. But most experts agree that you’ll need about 85% of your pre-retirement income for a comfortable retirement. Saving now (rather than putting it off till later) can make the difference between just dreaming about retirement and having the retirement of your dreams.
Saving is easy, especially when you pay yourself first. With automatic transfers and recurring investments, you barely have to think about pocketing money for the future.
But where should your money go? Should it be for the short term or saved for retirement?
This is the question you need to answer.
Like Dave Ramsey's debt snowball, there are some layers to your savings; hence, the savings onion.
Our savings onion started with an emergency fund. It's the place to fund first since you never know when you will need it. We live with 3 months of expenses in our emergency fund, since we are also saving for a house in a liquid savings account.
If you're getting started, reach for a goal of $1,000 in your emergency fund. It won't help you for too long if you lose your job, but will cover any emergencies that pop up (and they do).
After we got 3 months of expenses in our emergency fund, we stopped contributing money. We've used it when our windshield cracked thanks to a rock in the road, but thankfully, that's it.
The next step of our savings onion is retirement accounts. At work, I began contributing 6% of my salary to a 401(k) — enough to get my employer match. When I got a raise, I automatically bumped it up to 10%. If I never see the money, I can't spend it!
To increase our retirement savings, we each opened up Roth IRAs. We started out only contributing $100 per month each, but have been able to increase our monthly savings and were able to fill up the accounts.
The Roth IRA contributions were automatic — no need to manually make the transfer. With that layer of savings going, we moved on to the next step: saving for a specific goal.
In our case, we're saving for a house. Since we wanted to be aggressive hitting this goal, we set up automatic transfers from our checking account to a new online savings account — for a year. Our first year of autopilot savings was a huge success — in addition to the money being put away automatically, we transferred every extra penny at the end of the month into the account.
Thanks to the "extra" savings at the end of each month, we were able to triple what our automatic deposits would have contributed during the normal year.
Starting with the outside, here's what our saving onion looks like:
Specific Goal (a House)
What does your saving onion look like?
One of the most difficult things we're facing right now is saving for a number of different things.
In the short term, we're going on vacation in May, which requires some cutting back in the next few weeks to pay for the trip.
In the mid-term, we're saving for a down payment on a house, which will hopefully come in the next year or so.
In the long-term, we're saving for retirement, which we attack pretty aggressively with two Roth IRAs and a 10% contribution to my 401(k).
Tom is facing this situation, too, dealing with long-term and short-term goals.
We're not the only ones dealing with these issues. Thankfully, Vanguard has put together a podcast about this as part of their Plain Talk on Investing series.
In this podcast, we explore a question that many investors face: "How do I juggle multiple savings goals?"
Retirement, debt reduction, college expenses, and buying a house all require significant savings and investing. Jack Brod, head of Vanguard Asset Management Services™, says that to reach multiple savings goals you will need to prioritize them and you may need to make some tough choices along the way.
Listen to the podcast below; click play to get started.
One of the most basic questions anyone committed to saving money has to ask themselves isn't as easy to answer as you might think.
Are you saving for the right reasons?
I touched upon this briefly when talking about saving aggressively, but it deserves its own discussion.
When you say you're putting 10% of your salary into your 401(k), or you're pinching pennies to start a college fund, do you really know what you're saving for?
It's not enough to say "for retirement" or "for college." Sure, it's easy to say this when the goal is far off, but there's a deeper answer here.
For example, I'm saving for a house — not because I want to get into the real estate market, but because I want to provide for my family.
If you're saving to start your own business, chances are you're not doing it for the money — you're doing it for the challenge and the freedom to work for yourself.
The next time you put some money into your savings account or you decide not to make that big, unnecessary purchase, think about what you're really saving for.
Money is not the be all end all. Money is the fuel on the road to get to the be all end all.