Question 2: Where am I heading?

Defining your goals

Now that you’ve established your baseline, the fun part: deciding how rich you want to be. That may seem flippant, as for those struggling to pay off credit card debt and personal loans, living paycheck to paycheck is a challenge. However, setting and prioritizing your financial goals is the next important step you must take, and deciding whether you need $1 million or $10 million is retirement savings will make a significant difference to how much you need to save now, and whether you are 40 or 4 years from retirement will impact your investment strategy and approach to risk.

Setting your goals will not be a one-off process. Perhaps today, your most important goal is to pay off that credit card charging 20% APR — and so it should be. But next year, your credit card is paid off with no recurring balance, what financial target should be in your crosshairs next? Or say you budget $250 a month to chip away at that outstanding balance over 12 months, but tomorrow you move in with a roommate, cutting your bills and finding yourself with a little extra cash. How much should you increase your credit cards repayments by to reach your goal sooner, or should you think about starting an emergency fund, if you don’t already have one?

You will find yourself tweaking your goals as you go, but always consider the impact of doing so, and remember to revisit periodically: temporarily reducing your 401k contributions to increase repayments on a high interest loan may make fiscal sense (if you aren’t missing out on a company match in doing so), but if you forget to increase those contributions when the debt is repaid, you may find yourself ‘caught short’ at retirement.

Define the time-frame of your goals — my suggestion:

  • Short-term (3 – 12 months)
  • Medium-term (1 – 5 years)
  • Long-term (5 years – decomposition)

I recommend re-evaluating these goals at the shorter end of each suggested time-frame (e.g. annually for medium-term goals).

Think about which of the following goals could (or should) apply to you, and the time-frame which applies, and put them in order of what you think their priority is to you now. Make a list. Use pencil. It will change.

  • Emergency fund
  • Debt-elimination
  • Retirement savings
  • Home ownership
  • Net worth
  • Major purchase

We’ll discuss each of these types of goals in depth in coming articles, and help you prioritize and set firm, time-frames for achieving them. But first, I have two more questions for you...

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6 Responses to Question 2: Where am I heading?

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