Written by: Corey Janoff
This post was originally published on July 4, 2017 on our previous blog website: www.FinancialClarityBlog.com. With it being a short week this week and many people taking vacations, rather than post something new that likely wouldn't get many views, I figured I would bring back this one from 4th of July a couple of years ago. Enjoy!
We are all very privileged to live in the United States of America and enjoy the freedoms that we have. Our founding fathers and the men and women who serve this country have made great sacrifices to enable us to pursue our dreams and live our lives.
But freedom isn’t free. And neither is financial freedom. In order to reach our financial goals, it will take a lot of hard work and some sacrifices along the way. Most of us don’t have the time or money to afford to do everything we would like to do. But we can get there with some discipline and hard work.
Something everyone should do is set financial goals for themselves. Short-term goals, long-term goals, the more the better. If you can dream it, you can do it.
I like to start with a big goal and work my way down to small goals that will lead up to the big one. For example, if one of your goals is to be in a position to retire by age 60, what will it take to get there?
For ease of this example and without doing much math, let’s pretend you have calculated that you will need to have $4,000,000 accumulated in various investment accounts by age 60 in order to support the lifestyle you want to live. Let’s work backwards and set a target of $2 million by age 50, and $1,000,000 by age 40 (double your portfolio every decade).
Continuing to work backwards, let’s say you calculate you need to invest $36,000/year ($3,000/month) to reach that initial goal of $1,000,000 by age 40. We now know what we have to do: invest $3,000/month on average. How are we going to do that?
Let’s start by maxing out our allowable employee contribution to our 401k or 403b at work, which is $19,000 in 2019. That puts us about halfway to our annual goal. It will be wise to also max out Roth IRA's (or backdoor Roth IRA's if your income is above the Roth IRA eligibility limit) at $6,000/person or $12,000 for a married couple. For simplicity, we will put the remaining $5,000/year into a taxable brokerage account. We will invest everything in aggressive growth portfolios, since we have a good amount of time until the end goal of retirement at age 60.
Now, there are no guarantees that the investment portfolios will grow, or grow as much as we would like them to, but that is out of our control. We can only control how much we save and how/where we invest the money. That is why we will continue to review the progress towards the goal and adjust what we can control (how much we save, where we invest) if needed.
Now that you have a list of your goals you would like to accomplish, you are probably at the realization that it will be an uphill climb to reach all of them in the time-frame you want to reach them. So, we need to start prioritizing. Real estate agents recommend making a “Need-to-Have” and a “Nice-to-Have” list before searching for homes. What features are mandatory (need-to-have) and which ones would you like to have, but aren’t as crucial? Your list might look as such:
You can do the same with your financial goals. Keep in mind, the “Need-to-Have” and “Nice-to-Have” lists don’t have to be all or nothing.
For example, let’s say your goals consist of: retire by 60, pay for all three children to go to college so they don’t have to take out student loans, and take a $10,000 international vacation every year. After serious deliberation, you rank your goals accordingly:
- Pay for college
- Retire by 60
- Big international vacation
Because education for the children is your number one priority, let’s make sure that is on track to be fully funded. That would be on the “Need-to-Have” list. Retiring by 60 and the vacations are more on the “Nice-to-Have” list, with retiring by 60 being more important.
We realize we can’t accomplish all of them within that time-frame, but that doesn’t mean we can never retire or never take a big vacation. So let’s adjust the goals to: Retire by 62 and take a big international vacation every other year. After crunching the numbers, this plan looks more achievable.
If you are serious about reaching your financial goals, you are going to have to make some sacrifices along the way. If you didn’t read the post, This is Why You’re Broke, I encourage you to do so. We can’t do it all and still expect to achieve financial independence.
If we want to pay for all of the children to go to college, that may mean we have to scale back on the family vacations and not go to Hawaii every spring break. It may mean we get a new car every 10-12 years instead of every 5-7 years (and buy a more economical vehicle). Instead of going out to dinner at a nice restaurant every Friday night, we might need to only go out to dinner once per month (or quarterly). It may mean working a couple of extra shifts here and there, or picking up a side hustle to bring in some extra money each month so you can adequately fund the college savings accounts.
If you can dream it, you can do it, but it will take some hard work, dedication and sacrifices along the way.
So while we are chowing down hot dogs and guzzling domestic light brews while setting off fireworks, remember the sacrifices those before us had to make so we can celebrate today. And think about the sacrifices you are going to make so you can reach your financial goals, which will enable you to continue celebrating every 4th of July.
Have a happy and safe Independence Day!