One of the most popular job interview questions is Where do you see yourself in five years? My answer was normally a well-researched line that closely followed what I thought they wanted to hear. And usually I was successful in getting the job.
Relying on what people want to hear won’t help you achieve your financial goals though. Figuring out where you want to be in five or ten years can be a challenge, especially if you are new to money management and still trying to determine how you best deal with money. However, having a goal(s) can set you apart from the pack while helping you reach a dream (perhaps home ownership) or simply clean up some past mistakes.
Specific Financial Plan
While most people talk about a five-year plan, I prefer to look at it as a specific financial plan. Specific being the key word here. It’s easy to say I would love to own a beach condo or Wouldn’t it be nice to visit Tokyo? Yet while those are goals, they aren’t specific enough to engender change in most people. Maybe a better plan would be I want to have the down payment for a condo saved by 2025, or I would like to visit Tokyo in two years.
Determine your goal. The first step is to figure out what you want. Take a lazy Sunday afternoon and write out what you want to happen in your life. (While I’m specifically talking about money, you could also write out other goals for work or relationships.) Do you want to be retired at 40? Would you like to purchase your first home. Maybe paying off your credit cards is at the top of the list.
Rank them from most to least important. If you are focused on debt reduction, it doesn’t mean the beach condo is going away. It just means it’s on the back burner until your bills are under control.
Calculate your goal’s cost. This might take some research as well. Let’s stick with purchasing a home. Where do you want to live? Do you want the upkeep of a single-family home or the ease of a condo? In town/suburbs? Try to narrow down the section of town you prefer too. Then look at listings to see the price of a condo or home in which you’re interested. Is saving 20% of that total within the realm of possibility? If so, look at the potential payment. One of the worst outcomes would be to save 20% and then not be able to afford the monthly payment.
Review your current spending. I hate to harken back on budgeting but building a financial plan without knowing what you’re spending is almost impossible (especially if your plan is to reduce debt). Look at ways to cut spending and increase income. Even if you don’t drill down to the last penny, finding the low-hanging fruit that you can easily do without can give you a head start on success.
Make your plan specific. This is really the difference between any goal (including New Year’s resolutions) and successful achievement of a goal. If you’re trying to lose weight, set weekly goals but also watch your intake daily. If you’re trying to save money for a house, make savings goals but also watch your spending. Some people use SMART goals, others daily reminders on their cellphones. Break down the goal into achievable portions and review your performance over time.
Use positive reminders. When we were planning to go to Europe, I had a map of Germany and spent probably too much time determining the best route for our cross-country tour. I even found a quiz site for European road signs – it was fun to test myself. If you want a house, put the photo of a house you love on your wall, on your refrigerator, and by your bedside. Maybe even make it your phone lockscreen image. Whatever it takes to keep you motivated, use it.
Don’t give up when you screw up. You will have times when you screw up. You’re human, that’s life. But don’t let one mistake be the excuse to just throw in the towel. If you miss a monthly goal, look back on why, then rededicate yourself to hitting the target next month. If you’re finding it too hard, evaluate your spending and see if you cut too much. Maybe removing all the after-work trivia nights was too much; add some back in and just know reaching your goal might take a little longer. Allow yourself to be flexible once in a while when things go wrong.
Don’t let the what-ifs sink your ship. Especially when you’re young, it’s easy to wait on life to reach a certain point. What if I decide to move? What if she proposes? What if I receive a promotion so I’m making twice my salary? What if I lose my job? If you want a house in the city you’re currently in, you’re also probably going to want a house if you’re transferred or move out of town to be with your significant other. Similarly, if debt reduction is important, it’s probably going to remain important. Don’t let the vagaries of everyday life swamp your boat.
Celebrate the successes. No, don’t spend your monthly savings on a bacchanalia. However, a dinner with friends or even a special treat just for yourself may be warranted. This doesn’t have to be every month – once you get in the habit this process may be easier than you think. But if you have an extra-successful month or can redirect more money to your goal, congratulate yourself.
Listen to the supporters/ignore the rest. Some people are having an easier life than you. That’s a given. Some are having a much worse time. Some are in your corner, others are across the ring waiting to punch you. Share your goals and successes with people who care about you. Ignore the social media posts from people who just want to brag.
Creating a financial plan can bring clarity to your life but also order to your money management. It’s easier to save when you have a specific goal, especially if it’s something you’ve dreamed of. Once you’ve succeeded with your first plan, subsequent goals may seem easier in comparison. And really – worst case? You saved some extra money or got part of your debt under control. Doesn’t really seem like a worst case at all.