3. Personal finance basics – Evaluating your goals

It’s time to continue on our journey in gaining a general understanding of personal finance. Our last lesson, a look at goal setting, explored the first steps in taking control of your finances. I discussed the importance of setting specific short term and long term goals in achieving financial success for your future. But now it’s time to turn our attention to evaluating those goals that you’ve set for yourself. It’s critical that your goals are both specific and achievable and realistic. You don’t want your goals to be too soft or easy to accomplish, nor do you want them to be unrealistic. What good is a goal if it doesn’t challenge you, or you can’t possibly reach it? The below lesson will discuss how to better evaluate your goals by listing some examples and evaluating them for feasibility.

Let’s look at some of our goals from my previous article. These goals were created by a young adult just entering the workforce after completing college.

  • Save $5,000 to pay cash for a car in one year
  • Save $10,000 to have for a down payment for a house within two years.
  • Purchasing a house within two and a half years.
  • Begin saving and planning for retirement immediately following the purchase of my first home or within 3 years
  • Payoff my student loans within 5 years.
  • Be completely debt free within 5 years.
  • Pay cash for a beach home by 35.
  • Retire by the time I’m 40.

Let’s look at each one of these goals individually and evaluate them.

  • Save $5,000 to pay cash for a car in one year

We will have to better understand our financial situation to determine if this goal is even possible. Based upon their current salary of $30,000 per year, this person estimated that they take home $25,500 after taxes, or around $2,125 per month. In order to save $5,000 in one year, this person will need to save $416 per month to reach that goal ($5,000/12=$416). With all of this persons monthly bills totaled, their expenses equal roughly $1,125 each month (rent, utilities, groceries, some spending money, and all other expenses included). $2125 less 1,125 = $1,000 left over money after all expenses, thus $saving $416 per month is an achievable and realistic goal. Even after saving the $416, they still will have nearly $600 in spending money. This is a good goal to combine with other goals, by itself, it could be argued that this goal isn’t aggressive enough and you’re not challenging yourself. However, because this person has additional goals, we need to move on and see how they will fit in to the big picture.

  • Save $10,000 to have for a down payment for a house within two years.

Now, we know we have about $600 left over after paying all bills for a year and saving $5,000, so is it possible to set aside more money to meet our second goal for saving for a down payment for our first home? We know that $10,000 over two years is the same goal as saving $5,000 per year and that equaled saving $416 per month. We can meet this goal too with about $200 to spare ($1000-416= $584, $584-$416=$168). So yes, this goal is feasible too. But what about our longer term goals? With only $168 to spare for the month, we have to determine what’s the priority and better define our longer term goals to see how we can accomplish those goals.

Because we said that we would delay saving for retirement until we’ve become debt free and have money to pay cash for a car and put a down payment on a home, the priority is to completely knock out student debt in 5 years and be completely debt free. With an estimated $30,000 in student debt, making the monthly minimum payments over the next two years will only lower the balance by around $5,000 (I’m making up numbers, you will have to do the basic math). So, we need to figure out how much additional money it will take to pay off student debt of $25,000 in 5 years. To determine if this is a realistic and achievable goal, as lofty as it is.

We’ve determined that we have $25,000 in debt to pay in five years, or, $5,000, per year required to pay down. Similar to our goal in saving, we would have to pay $416 per month, to reduce $5,000 in debt per year. Considering we have only $168 left over after saving from our two previous goals, this goal isn’t even possible to achieve while accomplishing the other goals.

Because this goal isn’t achievable doesn’t mean you should stop there, it means maybe your goal is too aggressive (for now), maybe you should make it a goal to pay it off for now in 15 years instead. After you’ve met your two most important goals in saving for a car and house, you can readjust and tackle the student debt much faster. Maybe for now you decide that building an emergency fund with your extra $168 a month is a much smarter idea.

With regards to your longer term goals, I’ll show you how to better evaluate them when I move on to retirement planning in later lessons.

Thus, we must reevaluate our goals and prioritize what’s most important. There’s other determining factors involved that I don’t want to confuse you with (like determining if it’s better to pay down debt or save), but it’s important to see that you can make goals and evaluate them quite easily.

Next up, I will take a closer look at evaluating your monthly cash coming in versus going out, to help you understand how to make a budget that is both realistic and challenging, without taking away all your joy and happiness. That lesson will explore the various aspects of planning as well.

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