Money Lesson #2: Setting Financial Goals

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.

1. 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.
2. 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.
3. 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).
4. 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.
5. 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.
6. 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.
7. 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.
8. 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. For more information please visit the Carnival of Financial Planning.

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