“Is now a good time to buy a home?”
I receive this question like clockwork in nearly every personal finance speaking engagement I lead. And every time, I answer that rather than try to time the market (which is extremely difficult to do), you should make sure a home purchase aligns with your personal timeline and needs.
This advice applies to a broad range of financial goals. When we don't take the time to clearly define our values and objectives, we are prone to chasing the shiny object – whether it's the type of work we think we're “supposed” to do, or the financial goal we think we “should” achieve – rather than making decisions that are truly right for us.
In this chapter, you'll create a roadmap that is specific to your individual financial needs and wants. First, you'll consider your priorities to identify a number of different financial goals, much like you did in the beginning of Part 3, when you identified what a “good” job was for you. As you delve deeper, you'll make your goals more concrete by developing a timetable and quantifying the cost of each goal. Based on your savings rate, salary trajectory, and desired lifestyle, your initial list of financial goals may not be attainable. That's okay! You'll further review your goals and prioritize, revise, or eliminate them, until you have a feasible set by the end of the chapter – providing you a clear path toward making your preferred life a reality.
Where do you want to go? Answering that question is the first step to developing financial goals for yourself.
Most people's financial goals focus on either building a more solid financial foundation (e.g., by paying off debt or saving for an emergency fund) or protecting their long-term financial stability (e.g., by saving for a down payment for a home or retirement). When I work with clients, I like to classify financial goals into two categories: those that are mandatory and those that are optional. As you read this section, write down your goals in both categories.
While everyone's goals will differ based on their particular needs and wants, certain financial items are mandatory. You should list and prioritize the following goals, if you haven't achieved them yet:
Your optional financial goals will be dictated by your personal preferences. I like to group optional financial goals into several subcategories:
Once you've identified what you want, the next step is figuring out when you want to achieve your goals, and how much each goal will cost. Table 11.1 shows an example goal template that you can find and use at www.workyourmoneybook.com, or create your own for this exercise. Regardless, you'll want to identify the following:
Table 11.1 Financial Goal-Setting Template.
Goal Name | Goal # 1 | Goal # 2 | Goal # 3 | Total |
(1) Total Upfront Cost | ||||
(2) Timetable (in months) | N/A | |||
(3) Existing Savings for Goal | ||||
(4) Savings Required per Month ([1–3] ÷ 2) |
Once you've listed all of your goals and the cost of each goal, take a look at the total monthly savings needed to fund all of your goals over the next several years. Compare the monthly savings needed to fund your goals with your current monthly savings, which you calculated in Chapters 4 and 5. Is the total amount you need to save each month much more than you have available (and more than you may have available after a job change)? If so, don't panic – there are several strategies you can use to make the numbers work. Your options, from the least to most strenuous, include:
At the beginning of this chapter, you had the opportunity to identify a number of financial goals with no real restrictions. Now, I want you to take a closer look at the goals you listed and categorize them into the following buckets:
Once you've categorized your goals into must-haves and nice-to-haves, add up the monthly savings needed for each bucket. Do you have sufficient savings to set aside for all must-have goals, and some nice-to-have goals? If not, read on for more strategies you can use to make a workable plan!
Initially, we assumed that you would start saving for all your financial goals today. However, you can alter the timing of some of your goals based on their level of priority to create a more workable plan. Let's say you had initially aspired to create an emergency fund, pay off credit card debt, and save for a house purchase within the next three years. If that wasn't a feasible plan, you could adjust your timing to save for your highest-priority goals (i.e., building an emergency fund and paying off credit card debt) within the next year. After achieving those goals, you could then divert all of your savings toward saving for a down payment.
Take my clients Corey and Hannah. When we started working together, they told me their main goals were to save for retirement, their child's education, and a home purchase. They estimated that they needed to save $3,000 a month to be able to fund their goals. The problem was, Corey and Hannah were only saving $2,000 a month. To bridge the gap, we discussed a variety of options. Switching to more-demanding, higher-paying jobs could fill the gap, but that didn't really align with their desired lifestyle or job interests. Neither did spending their limited free time pursuing side hustles to earn extra cash. We then walked through whether they could cut any other existing expenses based on the strategies discussed in Chapter 5, but we had already optimized their situation previously.
Given these restrictions, I worked with Corey and Hannah to tweak the timetable for their plan. They decided that their timeline for a home purchase was more flexible than that of their other goals. As a result, they agreed to focus on saving for college and retirement in the immediate term, and then begin putting money toward a down payment as their salaries increased.
Another effective strategy for creating a feasible financial plan is to amend the cost of your larger, nice-to-have goals, such as saving for a house, buying a car, and saving for a child's education. In the previous example, Mary and Carl had wanted to purchase a $500,000 home in five years, but let's say they can't get the numbers to work. By forgoing certain amenities, they might be able to instead target a $400,000 home, which would lower the upfront cost of their goal from $130,000 to $104,000.
A hot topic for many of my clients is saving for their child's college education. They may initially assume they need to fully fund the cost of a four-year, private university, but after taking into consideration their other goals, some decide to scale back and fund half the cost of a private college, or fully fund a public university instead.
Joey Gladstone, a character on the '90s sitcom Full House, often got big laughs for using the catchphrase “Cut it out.”1 You might apply Joey's surprisingly wise words to some of your financial goals if your plan still isn't feasible after using the other strategies we've discussed.
For example, saving for a vacation home may have sounded like a great idea in the beginning of the chapter when you were letting your dreams run wild. But you might decide to throw that particular goal by the wayside after weighing a few weeks a year in Cancun against paying off your existing debt. This may be the iterative process you go through to determine if any goals are expendable.
When all is said and done, your goals may still cost more than you can save each month. If so, I encourage you to refer back to Chapters 4 and 5, which provide guidance for modeling out and cutting your expenses. Take a closer look at these costs, and identify which ones you may be able to decrease in favor of your financial goals.
By developing a workable financial plan that includes your goals and a timetable for achieving them, you'll take the first step to align what you value with where you spend your money.
On a day-to-day basis, having a financial plan can help inform your decisions while also serving as a motivating force for you to save more money. As an added benefit, you'll be less likely to get distracted or experience FOMO (fear of missing out) by what other people are spending their money on.
With a workable set of goals, you're ready to dive into the world of investing. In the next chapter, we'll discuss how you can grow your money to achieve your goals and priorities.