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How to Plan Long-Term Financial Goals

06.07.2021 by Harry //

planner

Being financially stable in life can open up opportunities and allow you to live your life free of stress. Although many people find it easy to plan for short-term financial goals, such as saving up to buy a new TV, it can be a lot more difficult to think about goals and plans for the long-term.

Typically, long-term goals are seen as achievements anywhere between 5-10 years from the present moment. An example of these types of goals would be saving up for a college education or buying a new home.

Basically, think of long-term goals as more expensive and more serious purchases (or investments). 

By having long-term financial goals you will also find that how you view money in the now changes.

The best place to start is by thinking about where you want to be in five years’ time. Where do you see yourself? Will you still be working? Retired? Buying a house? Raising children? Knowing the answer to this question will help you to better understand your situation.

Work Out Your Living Expenses

Once you know what your financial situation will be in the long term, you should start to think about how much you are going to need.

If you are going to need a large sum of money, then you are going to have to put a lot of money aside now. If you plan to retire and live cheaply then you can save less. You should set realistic goals that are personal to you and your lifestyle. 

https://www.forbes.com/sites/lawrencelight/2021/05/30/how-to-make-a-long-term-financial-plan/

For example, the average amount that people are recommended to save for retirement is 10%-15% of their income. This should give you a ballpark figure to know how you compare to the average person.

If you have any debts that need to be paid off then you should consider them, too. They are essential expenses and you should think of them as such. 

How Do I Achieve My Long-Term Financial Goals?

One of the best ways to make sure that you keep on track for achieving your long-term financial goals is to have motivation behind reaching them. It is all well and good to say “I want to pay off my debt”, but if that is the only motivation, your progress will decrease quickly and dramatically.

Instead, think about what else this can achieve for you. For example, if you pay off your debt you can stop paying interest. This means that you can have more money to spend on clothes, furniture, days out, etc. You can start saving up for a holiday or a wedding.

One of the easiest ways to do this is to enlist the help of a visual tool, such as a graphic organizer.

Essentially, they work the same way as a mind map. You write your major long-term goal in the middle (e.g. I want to pay off my debt) and then you sit and think about all the other ways that this goal will have an impact on your life. 

We can become unmotivated when things are too far in the future—that is why a lot of people struggle to save money in the long run. We find it easier to think of things we can buy if we save up a few hundred dollars, but saving up to buy a house in 10 years seems impossible, or not important enough right now at this moment. 

Create Smaller Goals to Get You There

By creating smaller and more manageable steps, you can connect the here and now to the future.

By creating a series of smaller goals you will find that you are led to your long-term goals without getting distracted or sidetracked.

Learn to Prioritize Your Goals

It is unlikely that most of us will have just one long-term financial goal to work toward. Often, we will want to buy a house, have children, send those children to college, and then retire. All of these desires can be costly and expensive endeavors. That means that you can easily become confused or misled when trying to reach these goals.

The best way to stay focused as life becomes chaotic is to know which ones are the most important. For example, if home prices in your area are not ideal, prioritize saving for the kid’s college fund.  

Consider Your Other Savings

Not only should you consider what are the big goals that you need to save for, but you should also always allocate a little extra money to an emergency fund. This way if there are any unexpected problems in life, even as minor as the boiler breaking down or as major as a pandemic making you redundant, you will not need to touch your savings for your goal.

https://www.clevergirlfinance.com/blog/ten-steps-to-creating-a-solid-financial-plan/

Depending on how major or minor the unexpected occurrence, your hard work could be wiped out. For example, if you have spent years saving for a house deposit and then become seriously ill, you could find yourself needing to dip into your house deposit savings to cover your medical expenses.

However, if you already have a money pot of savings set aside for emergencies then this means that you are more likely not to ruin your hard work.

You can still reach your long-term financial goals without having to worry about the unexpected. 

The best way to do this is to visually see everything. Many people find spreadsheets incredibly helpful. They can write down what the goal is, e.g. wiping out their debt, and then write down the amount of money that they have left after general expenses each month.

They can then allocate a proportion of this money to the “wiping out debt” account. This gives you a clearer picture of the exact time frame that you are looking at and exactly how much money you will need to do so. 

Conclusion

Whatever your long-term financial goals, you should always consider how realistic they are. Once you have an idea of how much money you will need and how much time it will take, you can start to budget accordingly. 

Writing down a priority list to focus on the most efficient goal is also an easy way to avoid distractions as you save.  

This reinforces the idea that what you do now matters in the future. If you need to write down all of the positives that achieving your long-term goals will give you. This way you can ensure that they seem more real and achievable.

Image credit: [KAROLINA GRABOWSKA]

Categories // Retirement, Savings, Tips

What You SHOULD Do with Your Tax Refund

03.08.2021 by Harry //

Stop! Don’t buy that new iPhone with your tax refund! You can put it to much better use!

The money you get from your tax refund can be a great way to set yourself up for a better financial future. If you are expecting a pretty decent tax return this year, here are some smart ways to make your money work harder for you.

Invest for Emergencies

If your transmission in your car went out right now, would you be able to afford to replace it?

Did you know it is recommended to have between three and six months of living expenses in a liquid savings account?

If you do not have any type of emergency fund, using your tax return to start one might be extremely beneficial for you. 

https://www.smartaboutmoney.org/Topics/Insurance-and-Taxes/Tips-for-Filing-Taxes/Smart-Ways-to-Use-Your-Tax-Refund

Instances like this are exactly what an emergency fund is for. You don’t need to save all of your tax refund for emergencies, but it is best to put back as much of it as you can.

Pay Off Debt

Credit cards typically have a high interest rate making them hard to pay off. Instead of booking a vacation with your tax return—which might not be that fun right now anyway—pay off some of your debt instead.

  • Start with your debt that has the highest interest rate, such as your credit card balance that seems to never get any lower.
  • Getting rid of this type of debt will save you money in the long run by avoiding all of the interest charges. 
  • If you don’t currently have any credit card debt, or you don’t have an interest rate/balance that is manageable, consider paying down the balance of your car or your student loans.

Both of these actions will save you money on interest as well.

Invest for Retirement

There is no such thing as too much money when you are heading into retirement. Sure, you might already have a retirement plan, like a 401(k) where your employer matches your contributions. However, you can also open an IRA to increase your savings for the future. 

There are two types of IRA accounts: Roth and Traditional. When you put money into a traditional IRA, you get an upfront tax deduction. The money will grow tax-deferred, but you will need to pay taxes on the money when you start taking money out.

https://www.moneycrashers.com/what-to-do-with-your-tax-refund-money/

When you put money in a Roth IRA, there is no immediate tax deduction, but when you start taking money out in the future, it is tax-free. There are no required withdrawals with a Roth IRA, meaning there is some more flexibility in it. 

There are limits to keep in mind when it comes to IRA accounts and 401(k) accounts.

If you are under 50, there is a maximum contribution of $6,000 in an IRA and $19,500 in a 401(k). If you are over 50, there is a maximum contribution of $7,000 in an IRA and $26,000 in a 401(k).

Put Money in a College Fund

If you are a parent, you might be wondering how you can save for your child’s college education. The best way to do that is with a 529 college savings plan, which is similar to a Roth IRA.

Your money will grow tax-free, and as long as it is used toward education.

There are two different types of 529 plans. The first is a college savings plan and the second is prepaid tuition. 

The college savings plan is similar to a Roth IRA account because you invest after-tax money in mutual funds. This plan will fluctuate in value depending on the value of the investments. 

The 529 pre-paid tuition plan will allow you to pay for all or part of in-state tuition at a public college. They might also be able to be transferred to an out-of-state college. There is also an option for a private college prepaid plan.

Increase Your Down Payment

If you are saving to buy your first home, your taxes can increase your down payment. This can help save you from expensive private mortgage insurance and can also reduce the overall mortgage that you take out.

If you already own a home, you can use your refund to do some improvements around your home. Improvements and renovations can help increase the resale value of your home.

Even if you aren’t planning on selling your home any time soon, improvements are always a good idea. Renovate that bathroom or finish the basement, whatever your house needs!

Make a Donation

Donating is a great way to invest in something that you are passionate about. Focus on finding charities that do the best for people.

Before you donate any money to a charity, do not be afraid to ask the charity’s representative some important questions. Ask them how they spend the money that you are giving them and how they are changing the world.

There are so many charities that are worth donating to. The representatives will be happy to answer those questions for you.

Image by Shutterbug75

Categories // Counsel, Investing, Retirement, Taxes

Should I Use My Retirement To Pay Off Debt

03.23.2012 by Matt Jabs //

The question…

DFA reader Josh asked:

I am in the military and at the point were i can get a bonus of $30,000 if I reduce my retirement to 40% of my base pay at 20 years – or – stay with high 3, which is 50% of my base pay at 20 years. There are options on how to get the $30,000: one payment, two at 15,000, three at 10,000, four at 7,500, or five at 6,000.

I have done some research on the subject and everything thus far says taking the 30,000 is a bad idea, but I like to cover all bases before doing anything. Also right now I have about $125,000 in debt, but I make enough to still meet all my bills. What would be the better thing to do, take the bonus and pay off debt, or keep the retirement plan for 50%?

The answer…

Josh, I believe you’re referring to the military’s REDUX retirement system. Since I’m unfamiliar I included a few great articles from The Military Wallet in the Resources and References section below. Check them out.

In general, here are three important factors to consider before tapping into retirement to pay off debt:

  1. your goals
  2. the type of debt you have
  3. your debt-to-income ratio.

Retirement goals

Everyone has different retirement goals.

How old you are, how much you have saved, and whether or not you plan to retire at all are several criteria to help layout your goals.

I don’t plan to retire. My goal has always been to find my passionate life’s work and pursue it, in some manner, until I’m gone – so my income may be rolling in until I die.

If your plan is to work a career for so many years and retire to something else, your goals will be different because you plan to live off retirement savings.

Define your goals to best answer the question.

Type of debt you have

Everyone has different types and amounts of debt.

Josh has $125,000 but we’re not sure what type of debt that is.

If the debt is low interest rate mortgage or student loan debt, tapping into savings to pay it off may not be a great idea.

If it’s high interest credit card debt, the decision will probably be different.

Define the type and amount of each debt to best answer the question.

Your debt-to-income ratio

Commonly referred to as your “DTI,” your debt-to-income ratio is a personal finance benchmark that relates your monthly debt payments to your monthly gross income.

Everyone has a different debt-to-income ratio.

Josh mentioned making enough to meet his bills but didn’t specify how much he makes or if he has extra income at the end of each month.

If paying the minimum payments on your debts leaves you with little to no money at the end of each month, taking the bonus to kick-start better financial health may be a good idea.

If you have extra money after meeting your monthly budget, it may be best to leave savings alone and use the extra to speed debt repayment.

Define your DTI to best answer the question.

*******

References and Resouces

  • “Your Debt-to-Income Ratio: What It Is and Why You Should Care” on FiveCentNickle.com
  • “Is REDUX Retirement Worth it?” on The Military Wallet
  • “Can Your Investment Returns Make REDUX a Good Retirement Option?” on The Military Wallet

Categories // Debt, Retirement Tags // Debt, Retirement, Savings

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