Booyah! One of my favorite topics. I will make a simple statement that expresses how big of an impact setting financial goals has had on our progress.
Without them, I don’t know where we would be.
We would be lost. I probably wouldn’t even have this site. I guarantee our Net Worth would be lower. Our stress levels would be higher. Having childcare costs dropped in out lap would have kept me up at night. Money fights would happen.
The simple act of writing them out, posting them at the beginning of the year and following up on them quarterly works for us. We have gone from saving next to nothing to saving 40% of our after-tax income.
A 40% savings rate did not happen overnight
It took 3 years of small, attainable, and difficult goals to build up to that level. Nobody likes seeing a 3-year timeline, and maybe you can do it quicker, but I think it is important to highlight that there is not a Big Bang type event that gets you to Financial Independence. Iterate and improve as you learn. Perfection seekers burn out or don’t start.
Setting Financial Goals
Where do I start?
It depends on your current situation. If you have debt, especially high-interest credit card debt we should start there.
My personal rule is to prioritize debt payoff over investing if the interest rate is above 5%. I base it on the long-term stock market gains being 8%. I am looking for the extra double on our investments instead of paying down debt at an accelerated rate.
That rule may not be for you, you may be more conservative or love the idea of being Debt Free more than I do. I will say that debt over 6% is a no-brainer to tackle first, tough to take a pass on guaranteed savings as you pay down that debt quicker.
This is how we guide decisions with our money:
- Get the Employer Match (401Ks have a lot of benefits outside the match, but take the free money)
- Emergency Fund (enough to cover your largest out of pocket insurance maximum)
- Debt over 5% interest
- Max 401K
- Max Roth IRA
- ESPP (this can be shifted up or down depending on the terms of your plan/confidence in company stock)
- Debt under 5% (excluding mortgage, looking at cash flow after debt elimination)
- Larger Emergency Fund (3-6 Months)
Feel free to shift and adjust this order to fit your comfort level. It is impossible to prescribe a perfect plan at a broad level. Feel free to reach out to me through the contact page if you want to chat specifics.
Regardless of what order you choose, you are improving your financial position and that is what counts.
Some example Goals to get you started
I went back through all of our yearly goals and put together a quick list to get you started
- Increase 401K withholding by 1% each quarter
- Grow combined income by 6% this year
- Do not take on any more debt (Use this one every year)
- Review all recurring payments to see if bills can be lowered or removed completely
- Make double payments on Student Loan balance
- Maintain current savings rate through difficult financial periods (like the birth of a child when your wife takes a break from work)
- Put $125 per paycheck into our Emergency fund
- Save 39% of our after-tax income (this was an overall goal that had a lot of smaller goals leading into it)
We have gone back and forth between yearly and quarterly goals depending on our situation. For example this year (2017) we set goals for each quarter to reflect the changes in income and spending that comes with a new baby.
One other thing I want to note is it is ok to fail, especially when you aim high. The best example that comes to mind is in 2015 we both wanted to increase our 401K withholding by 1% each quarter. At the end of the year, we had Mrs. AE’s up 4%, but mine was only up 3%.
Pursuing that one goal alone, we increased our savings rate by 3.5%. That change certainly doesn’t feel like a failure looking back.
Action Item: Go through the list of goals above and keep/modify the ones that sound appealing, add your own, and delete the rest. We want to have a solid set of goals to start attacking over the next year. Put this somewhere you can check in on it quarterly (the FI Action Series Template is a good location).
Goals need a plan
What are you going to tackle first? Second? Third? What are some changes we can make to improve our chances?
At first, you might be able to make progress on your goals without cutting spending or re-allocating your money. We were able to increase our 401K withholding by 1% for three quarters before it became noticeable at months end (now you know why we didn’t completely hit that goal from 2015). Which was a pretty good sign we were not tracking our spending and it was mindlessly flowing out of our checking account.
After that, we had to come up with a different solution, the biggest one being increasing our income to hit our investing/saving goals. I push goals focused on increasing income because they are two-pronged, you earn more money every year that can fuel you other investing or savings goals.
There will be an upcoming post 100% dedicated to increasing your income
The other big option is reducing spending, the spending exercise we did a few post back should help identify areas on the chopping block.
Action Item: After you have your goals, start sketching out a plan to hit them. Maybe you have been busting your ass at work and asking for a raise is feasible or you can identify some potential targets to reduce your spending. Doesn’t need to be concrete, there will be tons of tips and tricks further in the series.
If you are new to the Action Series, head over to to the Financial Independence page and start from the beginning using the template I created.