Setting Financial Goals - Part 2
An Example

(This is Part 2 of a three part series. See also: Part 1 and Part 3. Or you may want to start at the very beginning of this thread.)

OK, here we go. I will do my part, and you do yours. By the way, a lot of this includes participation from my better half (some explicitly discussed, some implicitly assumed :) Also, it is the perspective of a person who has already graduated and has started working. If any of you students do this exercise with me, it would be a great help to all of us, if you post your results in the comments. TIA.

Step 1: The dreams
a) I want to be able to switch to a lower stress, more satisfying job, (but likely paying lower salary), as soon as I possibly can :)
b) For the long term (say 25 years from now), our dream is to retire in a calm serene place, maybe by the beach or in the mountains. Also, we want to be able to travel to exotic places whenever we want, and for however long we want.

Step 2: Long term goal
Several calulators are available that will help you determine how much you need to save for your retirement (I used the one here ). In my case, to support our dream retirement life style, I assume we will need around 80K annual income (in todays dollars). With the assumptions of inflation rate of 3%, time to retire as 25 years, years after retirement as 30 years (hey, the plan should cover all aspects, likely or not !) and an annual yield of 8%, the calculators tell me we should have 2+ million dollars by the time we retire ! Sounds like a lot, but take a deep breath and crunch some more numbers. For instance, using another trusty calculator shows that if both me and the better half contribute the max to 401K over the next 25 years, and assume an average 8% return, this is doable ! Other calculators here and here also claim it is possible. So let's march on....

Step 3: Intermediate goals
Before we transition to the new (most likely lower-paying) job, we want to get rid of ALL debt. So our current aim is to payoff mortgage in ~10 years, car payments within 1 year (IF we buy it on financing) and mortgage for investment properties (as and when they happen) within a year or two of buying. This way, even with the lower paying job we can continue to contribute the max towards 401K and be on track for our long-term goal.

Step 4: Short term goals
Build car fund, emergency fund, investment property fund ... :).

Step 5: Pay day decisions and everyday habits
a) Every paycheck, make the maximum contribution to 401K as allowed by law. This really shrinks up our take home salary, but atleast we are paying our (future) self and reducing our contribution to the taxman :)
b) Put aside money for property taxes (Arrrrgh)
c) We recently switched to bi-weekly schedule for mortgage payments - this adds an extra payment every year that will apply to the principal. Also, we increased the amount to be taken out, so that every payment we make, some amount goes towards the principal. And of course, we made it auto pay :) If we stick to this schedule, we should get rid of our mortgage in less than 10 years.
d) Direct deposit a part of paycheck to our "savings" account which currently acts as our car fund, emergency fund, investment property fund all rolled in one :)
e) You guessed it right. By now, we have very little left in the bank for expenditure :) With changes in everyday habits (a topic that warrants a post by itself !) however, its quite enough for recurring bills and a few dinners out, some movies, some short trips every couple of months to meet friends, and one "big" vacation a year. We can manage a good (but not excessive) lifestyle. Hmmm.... Not bad :)

Step 6: The "statements"
* In the year 2007 we will add 31,000 dollars to the 401K (mine + better half's).
* In the year 2007 we will reduce mortgage principal by 15,000 dollars (in addition to the regular payments).
* In the year 2007 we will add atleast 5K dollars (stretch 10k?) to the "savings" fund.
* In the year 2007 we will actively look for investment properties that will support us in the intermediate/long term. It will be funded by whats saved so far in the "savings" fund and/or a loan, which we will have to start paying off aggressively.

(At this time we have no kids. When that changes, I will have to come revisit some of my goals :)

This example here is from the perspective of a fresh grad with a better half, who i swear must have been a squirrel in an earlier life :) If I were to do this exercise as a graduate student, my primary focus would have been (a) reduce/eliminate debt before graduating and (b) start a fund either for buying a car or for the down payment for the house or both. Also, if I were in the early stages of my student life, I would have included "getting an internship" somewhere high in my list (more on this some other time).

Again, I encourage readers who work on this exercise with me to post their goals, so we can all learn from each other. TIA.

There are several online personal finance blogs that publish the goals with a lot more details. Continue to Part3 of this series, where I have listed (and will continuously update) some that I have read so far and find interesting.

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