Updated April 24, 2021
In my last post, I updated and shared an overview of the “Six Steps of the Rat Race Off Ramp.” Today we’ll start taking a deeper look at each step, starting with Step 1: Setting YOUR Goals. For some readers, going through these steps may reinforce what you are already doing, but for others this may be a drastic change towards how you think about and take care of your money. The whole process of the ‘Rat Race Off Ramp’ will not be a sprint but will be a journey. Personal finance isn’t something you can successfully do for a few years. It is something you need to do throughout your life, and the more engaged in it you become, the less time it will likely take every year. This is a decision to move towards financial security and reach retirement with a large enough nest egg to last through retirement. This is your chance to change your financial future.
Why start with goals?
As with just about anything else you do, knowing the end result you are looking for will help you better plan your journey. This will mean setting financial goals for your future. Setting financial goals will help you plan to achieve them. You should have a plan for your finances, whether you are living paycheck to paycheck or already sitting on a sizeable nest egg.
Now is the time to start planning for your financial future. Not tomorrow. Not next week or next year. Now. Today. When it comes to personal finances, time may be the single most important factor helping you. The sooner you start planning, the more time you have to achieve your goals. The more time you have to save. The more time you give the magic of compound interest to work.
Financial goals fall into three time periods: short-term, medium-term, and long-term. Like all goals, you need to make them realistic. Just because this system is focused on building wealth, working towards financial independence, and saving for retirement, it doesn’t mean you won’t be able to do things for fun. You’ll just save and plan for your fun things. You will just need to think about the trade-offs between saving for your long-term financial goals and spending on short-term financial goals. With that, let’s break down what these goals may look like.
Short-Term Goals
Short-term goals are goals you want to achieve in less than 2 years. These can be simple one-time goals or goals that will build into medium-and long-term goals.
Some examples of short-term goals are:
- Track your monthly expenses
- Start paying down credit card debt or pay off your credit card debt
- Reduce spending to less than your income
- Reduce your spending to increase savings
- Save $500 or $1000
- Pay down student loans, car loans, or any other debts
- Build up an emergency fund (a minimum of 3-6 months of expenses is recommended)
- Save for a vacation
- Financially plan for starting a family
- Start saving for your children’s college education
- Start saving towards the down payment on a house
- Add a second source of income – you can use a part-time job or a side-gig
- Save a certain percentage of your income (5%, 10%, maybe more)
Medium-Term Goals
Medium-term goals should be planned for between 2 and 5 years.
Some examples of medium-term goals are:
- Save to buy a car
- Save for a down payment on a house or buy a house
- Increase the amount of income you save
- Finish paying off credit card debt or student loans
- Take a dream vacation
- Save for your children’s college education
- Many of the short-term goals can also be medium term goals, depending on their importance and how much savings is being dedicated towards each specific goal
Long-Term Goals
Long-term goals will take longer to achieve, and should have a goal date of more than 5 years.
Some long-term goals are:
- Buying a forever home or paying off your mortgage
- Paying for your kids to go to college
- Continuing to increase your savings rate (maybe to 30% or more)
- Early retirement
- Traveling
- Just like with medium-term goals, some of the listed medium-term and even some short-term goals can build into long-term goals
Goals Working Together
Another way you can accomplish more of your goals is to have them build on one another. By accomplishing one goal, you can now allocate more money towards other goals, bringing them closer to being achieved. Once you’ve saved for a down payment on a house, the money you were saving each month for the down payment can go towards increased savings, retirement contributions, or towards your children’s college education. As a second example, maybe a long-term goal is to save 25% of your income (or more). You can use short-term and medium-term goals to help you work towards your long-term goal. Maybe a short-term goal is to start saving 5% of your income, and your medium-term goal is to increase that savings to 15% of your income. Once you achieved your short-term and medium-term savings goals, you only need to increase your savings rate from 15% to 25% of your income to achieve your long-term savings goal.
Just looking at your short, medium, and long-term goals can be daunting. So, start with a small short-term financial goal, and build from there. By completing just one of your short-term goals, you can begin to build confidence for achieving more of your goals and improving your financial future. As you continue to accomplish more goals, your confidence will continue to grow, and your medium and long-term goals will become more and more achievable (and less daunting). Also, don’t get attached to your goals. Some of your goals will be more important than others. You may just take some goals off your list. Others will change them over time.
For our family, one of our goals is to be able to purchase a home outright when my wife gets out of the military. There are other factors that will be considered at the time, like mortgage rates and changes in home prices, but right now, the goal is to have enough money saved to buy a forever house in a forever location. If we don’t have a mortgage, our monthly expenses will be drastically reduced, allowing us to have significantly less monthly fixed expenses, and it will help us achieve one of our other long-term goals, which is traveling. Buying a home outright when my wife gets out of the military is a long-term goal, but one short-term goal (savings rate of 20%) and one medium-term goal (savings rate of 30-40%) help us build toward this long-term goal.
Wrapping Up
What are some of your goals? Please share some of your goals with other readers! Many of us will probably have overlapping goals, but sharing ideas may help others see goals they had not previously thought of. In the next few days, I’ll be updating Step 2: Your Financial Snapshot. Keep an eye out!
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