Money Lesson #2: Setting Financial Goals
SMART Goal
- Specific
- Measurable
- Actionable
- Realistic
- Timely
My wife pregnancy is coming along well, except for occasional all-over-the-body-ache. While I was giving her a massage last night, I was able to go over another financial lesson with her. The second lesson was focused mainly on financial goals.
Photo from Wikimedia Commons
Types of Financial Goals
There are many types of financial goals:
- Pay off debt
- Establish an emergency fund
- Retirement savings
- College savings
- Down payment on a house
- Etc.
Prioritizing Goals
Next, we went into the subject of priority. There are so many financial goals, how do we decide which is more important. Do we have to do them one at a time — or we do some of them together? This is how we prioritized our goals — yours may be different.
- Credit Card Balances – Interest rate on these are usually in the high teens, or low twenties. So paying off credit cards always takes priority in our family.
- Emergency Fund – I have said in another post that everyone should have at least 3 months worth of expenses saved in an emergency fund. However, I wouldn’t let it sits in a low-yield savings account — I invested mine and it more than doubled over the years.
- Retirement Savings – This is high on our priority list because (1) it helps us save a lot in taxes each year, and (2) our son can still go to college even if saved less than he needed, but we can’t retire without money. We are currently contributing the maximum allowed. But if an emergency came up, we could cut 401k contribution down to 6% (to maintain maximum company matching).
- Savings for College — We will be starting this soon. We have a plan to save $5,000 per year for the next 17 years to reach $250,000 goal. However, we are willing to sacrifice this if our retirement savings are not on track.
- Car Loans – My mom gave us a no interest loan to pay off the car loan from Honda Financing. This saved us a bundle of money. Since I am taking care of all household expenses, mom has been very lenient about how fast I pay her back.
- Home Mortgage — Our 15-year mortgage is only 5.25%. As per “Mortgage Refinancing That Nearly Cost Me $370,000,” we are not in a hurry to pay this off; especially with our tight cash flow.
- Student Loans – We don’t owe any student loans. But if we do, this would be low on our list also because the interest rates are low and interests paid are tax deductible.
- Down Payment for a House — We are fortunate to own a house already, so this is not on our priority list. For people who want to own a home, this would probably be right behind emergency fund or retirement savings.
Making each Goal S.M.A.R.T
Lastly, we discussed the idea of S.M.A.R.T. goals:
- Specific – knowing exactly what we want – i.e., $1 million investment portfolio
- Measurable – ability to track progress – i.e., we can come back to the spreadsheet above and see how well we’re doing
- Actionable – knowing the steps needed to achieve the goal – i.e., by saving and investing our money
- Realistic – being in the realm of possibility – i.e., $1 million is within our saving and investing abilities
- Timely – knowing when the goal will be achieved – i.e., 2017
I hope you enjoy this lesson and can share it with your loved ones. Thanks!
Other lessons:
- Money Lesson #1: Basic Finance, Cash Flow, and Risk Management
- Money Lesson #2: Setting Financial Goals
- Money Lesson #3: Investment Vehicles
- Money Lesson #4: Choosing the Right Tool for the Job
This article was featured in the October 4, 2007 edition of the Carnival of Financial Planning hosted by The Skilled Investor’s Financial Planning Blog.
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That’s really sweet of you.
Are financial lessons your evil payback for having to give your wife a massage or is she actually interested?
I’d order financial goals in the same way as you, apart from putting no.4 towards the end. The only college I’m planning on funding is my own second ‘for fun’ arts/humanities degree in my retirement.
“Student Loans – We don’t owe any student loans. But if we do, this would be low on our list also because the interest rates are low and interests paid are tax deductible.”
You have to be careful here…
From irs.gov
“For those whose filing status is single, head of household, or qualifying widow(er), the full $2,500 deduction is allowed for MAGI levels equal to or below $50,000. For MAGI between $50,000 and $65,000, the deduction amount is gradually reduced. The Form 1040 Instructions show you how to compute the deduction. If your MAGI amount is $65,000 or more, there is no deduction.”
I ran into this a couple of years ago
@Tom – Thanks!
@Plonkee – You have to read the first post. Basically, it’s a big risk for us if she doesn’t know our finances as well as I do. So we agreed to work together, so that she can learn everything she needs to know in case something happens to me.
@Josh – Welcome to Moolanomy and thank you for pointing out the phase out. That’s how long ago I had to deal with student loans. I should have checked that.
You are a dedicated blogger, you give your wife a message and discuss finances
I figured she did all the hard work carrying the baby and all. A little bit of massage every night is just the right thing to do for her.
I agree that paying off credit card debts should always be NO1 priority. The interest rates on many of these are crazy. I know that there is an argument to pay off mortgages first because they are a substantial debt, but the interest rates are much lower and over time even a small credit card debt can quickly spiral into a major financial problem with a high interest rate. I also agree with setting SMART goals, I use these all the time at work and continue to do so in my personal life.
As always, good reminders. Thanks.
i am so glad to learn from you and i believe that your instruction is very vital in todays life. i have never seen such an easy explanation like yours which makes even a lay man understand account easly. i have already started to change my way of beaving with money. thank you. i look forward to learn more from you.