When do I want to retire? How much do I want to have saved? What sorts of things do I want to accomplish before then? I’ve begun to think seriously about these questions lately.
Jim at Blueprint for Financial Prosperity recently offered some tips on how to draft a basic financial savings plan, a tool that could help me craft a road map for my future. He says that failure to plan is one of the seven deadly sins of personal finance. I agree. I believe that the road to wealth is paved with goals, and planning is one of the most important parts of the journey.
Jim writes that the roots of his planning technique are grounded in the MBA classes he recently completed. He’s developed a system that reminds me very much of my spending plan, but focused on the long term. Here are his recommendations:
- Create a rough draft. Jot down anticipated major expenses between now and the time you retire (or whatever future date you pick). You don’t need to be precise. Just make your best guess as to when you’ll buy a new home (and how much you’ll spend), when you’ll have children, etc. The key here is to create a framework, not to get things exact.
- Calculate savings needs. Once you’ve listed your estimated future expenses, work backward for each item to create an annual budget. If, for example, you decide you want to buy a $15,000 car in five years, you’ll need to save roughly $3,000 a year. The calculations are a little more complex, but this is the basic concept: after you’ve set a target, break it down into smaller chunks.
- Adjust your plan. After you’ve computed your annual budget for your various goals, ask yourself whether your expectations are realistic. You may need to reduce your target spending (maybe budget for a $10,000 car) or to delay the spending (plan to buy the car in seven years, not five).
- Consult with a friend. Once you have a plan in place, find somebody you trust and ask them if it makes sense. It’s easy to lose sight of potential problems when you’re mucking around with the details. Sometimes an outside observer can point out flaws or suggest improvements.
- Revisit annually. Your circumstances are constantly changing. Goals and plans that were right for you last year may no longer be appropriate. I’ve been learning this myself. Eighteen months ago, I set a list of 101 goals I wanted to accomplish in 1001 days. I’ve done many of these things, but others are no longer priorities. It’s important to periodically re-evaluate your plans.
For much more detail, consult the full article. Jim notes that this sort of savings plan focuses only on the expense side of the equation. You may find that in order to meet your goals, you need to boost your income.
Kris and I have never created a long-term financial plan. When something major comes up — like buying a house — we sit down and brainstorm a plan, but most of the time we just wing it. Now that I’m approaching 40 (I turned 39-1/2 last week!), I’m beginning to think more about the future. I’ve always been a spontaneous sort of guy, but now I’ve reached a point in my life where I want a little less uncertainty. I want to have a destination in mind, and I want a map of how to get there.
To that end, when Kris and I take our brief vacation later this month, we intend to spend some time developing a long-term plan. (In between horseback riding and kayaking, of course.)
Photo by mamchenkov.
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I enjoyed Jim’s original article, and your recap of it here. One of the most important take-aways for me is the idea of working backwards from an end goal–to break up that larger goal into smaller, more manageable pieces. This can be done with something as small as the 6-month auto insurance premium, or as large as your retirement “number.”
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Great post! I think that the “revisit” step is also quite important. Hopefully we’re all progressing and changing, and annually reviewing where we’re at and where we want to go is a good idea.
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Just out of interest, will you be attempting to complete ‘Writing Goal 7. Participate in National Novel Writing Month’ this November, or has that one fallen off of your priorities list?
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Heh. Good question, Kirn. To be honest, it’s off the priority list. I’d love to do it, but it’d be SO HARD for the perfectionist in me to do it without proper planning.
Still, now that you mention it…
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Excellent article. Just as the road to wealth is paved with goals, so is the road to financial survival. Planning is no longer just an idea for financial planners, but its for everyone. The comming recession will put everyone on a budget. Planning is likely to become very popular.
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One major aspect of planning that is glossed over in both articles is that you need to figure out your life goals first. If you don’t feel strongly about what you’re saving for, you won’t do it.
We kinda do a savings plan. We call it our “five-year plan”, and we’ve reviewed/rewritten these every 6-12 months since we’ve been married. Now that we have kids, the horizon is out to 20 years or so (when the kids theoretically lose the financial umbilical cord). We plan for retirement, but given that DH is 47, retirement is part of the 20-year plan as well. (Don’t look at the investments! Don’t look . . . !)
When we got married, we wanted to live much like we’re living now (single-income with kids geographically near family; sane but fun family-oriented lifestyle). Some people consider us “lucky”, because most people we meet aren’t aware of the amount of planning it took to save, invest, gain work experience and goodwill, etc. and some of the calculated risk we took on to get what we wanted. I mean, we won the “birth lottery”, so we are lucky that way. Without planning, we could easily be living paycheck-to-paycheck in debt to our eyeballs and both working crazy hours to never see each other or the kids, and we’re not.
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Hehe, well, I try to build a lack of proper planning into my plan.
I wasn’t sure I was going to enter this year, but for some reason I change my mind when the weather gets colder. My NaNoWriMo username’s ‘Keiron’ if you decide to go for it and are looking for ‘Word Buddies’.
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I just love that you know you turned 39 1/2. I told an uncle last year that I was 22 1/2, and he burst out laughing… “You still count the half years?” My excuse: my brother’s birthday is 6 months to the day apart from mine.
I’ve been taking CFP classes, and two of the projects involved retirement planning. It was a great experience to actually do the calculations and compare where I am now to where I want to be. Now that I have the framework I can easily update it each year.
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I love that you’ve ‘always been a spontaneous sort of guy’! We ended up becoming that way as life threw a lot of events at us that we couldn’t plan for. We’ve been married for 20yrs and have ended up living in 3 countries in that time (chasing a paycheck). This has made planning our finances interesting. I have however been able to stay home and raise our 3 children in each of these environments because of our basic financial philosophy. We make do, recycle and repair our things, live below our means etc. We both have skills within the home that save us a lot of money – hubby can do electrics, car repair, plumbing etc; I cook, sew, knit, put up shelves. Most people think that we must have corporate support to maintain the lifestyle that they think we have, but no company ever looks after you. We spend our spare time setting our financial goals to maintain the equilibrium we try to create each time we move. We have made many sacrifices in order to maintain our family unit in the face of our ever changing financial circumstances though.
Funny how as you reach 40 the desire for more stability sets in…however spontaneous you’ve been in the past!
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Good luck with your planning. I have always found planning out my financial goals to be a liberating experience. If you make a plan and stick to it, you don’t need to worry about your money – you are on track to meet your goals and can spend the rest guilt free.
RDS
http://www.financialvalues.blogspot.com/
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Great article, thanks. The long-term planning definitely fits my personality since I tend to be a little OCD about managing my life in general.
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Funny you should publish this today. My DH and I spent a long car drive this weekend talking about exactly that. And we made some decisions about what direction to take to make our next goal (which is to move to a new area, with no contacts, no house, and no job).
So I noodled on the internet yesterday, and found a piece of property that is SO PERFECT for the long term plan, that DH has asked me to move forward on it.
If we hadn’t focused on our next steps, I would never have started an action plan…wish us luck!
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Here’s a question.
I’m 21. Would the way that someone my age goes about investing for the long-run differ from someone who is, say 40?
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Re-visiting your plan has never been more important than it became this week. With the stock market plummeting, many of us found our 401K and 403b’s loosing upwards of 17-20%!
Now more that ever it becomes apparent that investing in other areas may hold value. It is definitely worth considering, taking a look at other income producing assets.
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Perfect timing! My husband and I really need to sit down and create a long-term financial plan. We’ve got plenty of goals, but few ideas on how to actually get there. I’ll be sure to read the original article.
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It’s good to see that you started thinking about retirement and your long time money goals.
However as most people on the site know – the earlier you start saving the more you will have once you retire (thank you compound interest!)
I would go as far as to make an account for a newly born baby and start investing some money for your child.
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It would be simpler to just resolve to save 20% of your gross income each year and invest as much of that as possible into a reasonable asset allocation of low cost index funds. Along the way, if you decide you need a new car or a house, divert some of the savings into those things, rather than the index funds. Just don’t overdo it with the cars (buy used) and don’t buy into a neighborhood that you can’t afford, or you will fritter away your money keeping up with the Joneses. This seems simpler than going through all that planning process, especially since the real key to eventual success is saving that 20% and hoping the markets are kind to you. When you retire is not up to you. It’s up to how much you can save and how well the markets treat your asset allocation of low cost index funds. You can’t predict the market, and you really can’t predict how much you will wind up actually saving.
And once you actually do retire, your success in outliving your money will pretty much rest on how well the market does the first few years of your retirement.
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This is really great usually when I think about saving it’s not for the extended future, it’s normally to a large purchase or a major goal. I’ll really be able to use this to help me out. Thanks
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“You may find that in order to meet your goals, you need to boost your income.” A no truer statement can be made! My wife and I busted our rears trying to make the budget work and the never could get ahead. I finally swallowed my pride and began delivering pizzas at night-me, an advertising EXECUTIVE!!! This extra $1000-1500 a month was all we needed to get our heads above water and begin to make some forward progress.
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Very good information!
I’ve been thinking more about this since the financial melt down. I read stickyasset.com and have been watching more financial advice. It seems there are options for people like me.
This helps.
Wilson
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This is good info! One quick and easy way to try and estimate a retirement ‘number’ is to think about what you’ll be making when you retire. Using a financial calculator, I quickly calculated that a 35 year old making $40k a year (assuming that income will grow at 4% a year) will be making about $130k a year by age 65. A conservative withdrawal strategy in retirement is 5% of the total savings a year. This means that to replace the entire salary of $130k a year, this 35 year old will need to aim to have $2.6 million saved by the time they retire.
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