Setting My Own Personal Finance Goals

On an earlier post about losing financial focus, Erick left the following comment:

You mention that you are making progress to your goals but still have a long way to go. What are these goals? I assume reaching the “crossover point”? And I know this is nosy but when you say you have enough money in the bank to “easily” do those things, what do you mean in terms of actual figures? I’m not asking what your current bank account balance is or anything but I constantly read about people reaching financial independence what does that mean in general terms of actual dollar amounts for an average person with modest living? $1/2 million in the bank, $10 million, what??? I realize that it depends on what your standard of living is and such but I am just looking for some examples of actual dollar amounts that I can compare. thanks in advance.

Given that, I thought it would be useful to discuss my current financial goals in great detail. We’re basically marching through this list of goals in order, focusing vigilantly on the first one until it is gone, and continuing on with future ones.

Goal #1: Eliminate all remaining student loans

Right now, I have a single consolidated student loan outstanding that has a balance of about $20,000 and my wife has a single consolidated student loan with a balance of about $12,000. They’re both locked in at fixed rates, with mine a bit higher than hers (7.5% versus about 6.75%). Our biggest, most immediate goal at the moment is eliminating those loans, and we’re contributing every extra dollar we can to making both of those vanish. In terms of time, we are hoping to eliminate my debt by the end of 2008 and hers by mid-2009 (assuming no major life changes).

Eliminating these loans will leave us without any debt except for our mortgage. This is important to us, as we have a great desire to minimize our required monthly expenses so one of us could easily make a career change or choose to stay at home if we so chose.

Goal #2: Replace both of our vehicles

Once our debts are gone, we’re going to begin saving to replace both of our vehicles with late model used options. We’re anticipating a cost of between $12,000 and $20,000 a vehicle, as we’re looking for long-term reliable vehicles.

We have a small amount saved for this already, but we’re not growing that money until the student loans are gone. If we need to replace a vehicle before then, we will take out a loan to do it, but we don’t currently anticipate it.

So, once our student loans are gone, we will begin saving a total of $35,000 for two vehicle purchases. We are hoping to be able to pay cash for a vehicle by October 2010, then for the other one by the end of 2011.

Goal #3: Mortgage elimination

Once we have new vehicles, we’re going to focus on eliminating our mortgage, which should have a balance of about $140,000 at the end of 2011. Given that we have no car needs at that point and no other major debts, we will begin eliminating that big debt as quickly as possible, with at least double payments (and likely larger). We anticipate paying off our home in 2019, on our rough timeline.

Future Goals

Once that is accomplished, we’ll be around 40 years old, owning our own home and being entirely debt free. At that point, we have a lot of goals to dig into, from a house in the country to ensuring our children get out the door on their own two feet to an early retirement. We do not have goals associated with our net worth, though it is a good indicator that we are moving in the right direction.

Our route to these long-term “dream” goals is financial responsibility now. We won’t make it there without working hard and having some financial discipline today, so we practice frugality and make diligent, automatic debt payments.

Even more importantly, we find a lot of inspiration in watching our progress towards the goal. It’s a lot of fun to watch that debt go down with each payment, and it feels very good.

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  1. BigRed says:

    It’s heartening to see that people other than my husband and I are looking to pre-pay the mortgage to get that debt out of the way early. My sisters all look at me like I’m nuts–we make by far the largest household income of my married sisters, but are in the smallest and least expensive home (1400 sq ft) and have been paying it off at an accelerated rate since refi’ing 5 years ago (to 5.875% interest conventional 20 year loan). WE prepaid to get the PMI down on the initial loan, and have been doing an extra $600 a month to get the principal down.

    They all think we are insane for not tapping the equity immediately, moving up to an unnecessarily larger and more expensive home (which would be more to heat and furnish). We have window unit AC rather than central (the house is 60 years old), no dishwasher (except the dogs or the kids), one bathroom, etc. They think that debt is somehow working in their favor, and I know they probably get a bigger tax deduction for their mortgage, but honestly, I like the concept of having a house paid for in full.

    Add to that the issue of having a disabled child, and the idea of a place that she can live in with perhaps a live-in assistant, after we are dead and gone, and being able to provide a reasonably-sized home is a great boon for us.

    I would love to see an article sometime on providing special-needs trusts (or any trust, actually) for one’s kids. There are so many issues surrounding this–apparently, certain types of trusts can invalidate state- or federally-funded programs (Social Security, etc.) for special-needs individuals. I don’t have the time to read the legalese on this, and would love to see you address the topic.

  2. Nathan says:

    I think that it is interesting that you didn’t mention a savings goal for your retirement account. Do you plan on saving for your retirement after paying off your mortgage? It seems like with the power of compounding interest that it would be better to at least have some goal for a retirement account before you pay off your mortgage. By the way, I really enjoy reading your blog. Thanks!

  3. margo says:

    I enjoy posts like these, Trent. It is inspiring to read about your progress over time, your goals, and your vision for your family’s future. Not many people have the courage to be so frank about their own lives, financial and otherwise, which is one of the most compelling aspects of your blog.

    Thanks!

  4. Trent says:

    I don’t view retirement savings as a goal, really, just something very sensible I should be doing.

  5. Fecundity says:

    This question may not apply to the American home owners, so forgive me if it makes no sense.

    Have you looked at the penalties involved in pre-paying your mortgage?

    In Canada, if you’ve gone with a traditional mortgage from a brick-and-mortar bank, you’ll have strict limits on how quickly you can pay down your mortgage, and to change it you’ll often have to go to the trouble of refinancing, which has its own costs if done earlier than at end of term (usually 3 to 5 year terms on a 25 year mortgage).

    We’ve gone with ING Direct, which is more flexible in that it allows us to increase our biweekly payments by 25% (per year) and to pay up to 25% of the principal as a lump sum each year. However, even with that, if I won the lottery tomorrow I wouldn’t be able to dump $153,000 into my mortgage without paying some sort of penalty to the bank for their loss of income.

    Do you not have this issue in the US, or have you figured out how much your bank will charge and calculated it to be worth it? It seems that if the issue exists, you might want to find out exactly how much you’re limited to a year and perhaps reprioritize your debt repayments to ensure you’re still coming out debt-free along the timeline you desire.

  6. Trent,
    I think it’s great that you detailed your goals. We are much more ready to achieve them once they are stated publicly and on paper.

    BigRed,
    We set up a special-needs trust for a family member 2 years ago. Once it is done, it is so much easier to rest at night knowing things will be taken care of.

  7. LC says:

    I think that identifying your priorities in life should go hand in hand with your financial goals, and outlining them like this is a good way to make sure you are progressing toward them. Great post!

    @Fecundity
    When we bought our home, something we made sure of was that there is no penalty for prepaying, and almost none of the companies we looked at had one. But we had been warned to check this so I think it was more common in the past but is no longer common in the US since people wouldn’t accept it. However, there is a fee for the biweekly plan, which doesn’t really make sense – why would you do that if you can send in extra payments any time you want for free?

    One other thing I was warned about was sending in small checks for principal payment. I have heard about some people who sent their regular mortgage check in addition to another check for roughly the same amount and then the mortgage company applied it to the next month’s payment even though it was marked for principal only. The advice was to make a large lump sum 1-2 times a year it so is much harder for them to get “confused”.

  8. Kay says:

    On a whim, I recently put our data into a mortgage acceleration calculator. Discovering that if we doubled our payments, we could pay off our home in 2016 rather than 2036, saving ~$274,000 in interest, was jaw-dropping.

    It made me take a look at our other goals. We intend to subsidize college for my stepson, who will finish high school in 2011. If we scrimp a little until then and put college money toward the mortgage (which has no pre-payment penalties), we can pay off the house and be free and clear in time to help him with his loans.

    Can we do it? I’m not sure, but we may give it a try. That’s just 9 years of extra frugality and/or extra work, and to be in our mid-40s with the house paid off is an enticing goal. (And, like Trent, we don’t see retirement savings as a goal — those are fixed items in our budget and simply not up for debate while time is on our side.)

  9. Heidi says:

    @Fecundity: fixed rate mortgages don’t have prepayment penalties here in the US. We’re seeing them more on the one- to three-year adjustable ARMs, at least that’s been my experience.

    I have so much debt right now, I can’t wait to be your position, Trent! It must feel great to know that you’ll be debt free in just over 10 years! Most people have 10-year goals, very few have 10-year PLANS that get them there. Good luck!

  10. Kevin says:

    Trent has covered this issue before (mortgage prepayment vs. investment). And if you use a calculator from this link (under the housing section), you will probably find that, if your goals do not require you having your house payed off, you are better investing the money.

    http://millionairemommynextdoor.blogspot.com/2007/08/110-personal-finance-calculators-fast.html
    (great website for personal finance calculators)(I think Trent linked to it a long time ago)

    However, you have the discipline to put your extra housing payments into the investment account instead of the house and not blow it. Success in personal finance always comes down to discipline in my opinion.

    On a personal note, when I bought my house I said that I would pay it off real early and be out of debt, but in reality if I can get 8% in the market and deduct my mortgage interest…. well I’d be crazy to prepay my house (obviously my goals are making $$$ and not necessarily being out of debt. And yes, I understand that not everyone shares these same goals).

    Just a reminder to everyone… some debt can be good, if treated correctly :)

  11. Sally says:

    Heh, my only real goal as far as net worth goes right now is to get it above zero! Otherwise, my primary goal is to pay down my $50,000 of student loans by my 30th birthday on August 13th, 2015.

  12. Sandy says:

    If you can become debt-free by 40, that is a wonderful thing! I’m several years older than you, but am debt-free, including mortgage. I have $1,250 per month as discretionary income now! I can’t even describe that feeling. It’s like a huge weight has been lifted off of me. But — I did refinance first to a fixed 5.5%, 15 yr. mortgage (in 2005), w/no prepayment penalties. I divided by 12 the yearly mortgage payment, and then had my mortgage company automatically deduct that amount every month toward the principal, and they did. This was in addition to the monthly mortgage payment they were also auto. deducting, so I was making an extra mortgage payment per year. Every time I had extra $, I sent them a check and told them to apply it to the principal. (To speed things up more, I sold one house in 2005 and bought another one that cost less — moving was so much work, but financially the best thing for my future). If you become debt-free by 40, you’ll have more money than you know what to do with to invest for retirement.

  13. Sandy says:

    Also — have a used 2,000 car — plan to keep it for as long as it runs, so agree w/you on that. I bought it just as it came off of a lease and never have had any problems w/it. I would get my next car the same way.

  14. tuck says:

    Great post, Trent. Inspiring.

  15. jan says:

    Interesting post. Good goals. However I cannot forget what the Word says, “Self, you’ve done well. You’ve made it……” And God showed up and said, “Fool, tonight you die. And your barnful of goods..who get it.”(Message, Luke 12: 16 – 21) Don’t leave God out of your plans. He holds the future!

  16. DNA says:

    PF books often state that you are in good shape to retire if 1.)you are debt free AND 2.) you can live off no more than a 4% draw from your savings each year; and you are better off if you can live off only 2.5%. Additionally, some new models recommend setting aside $100-$200K per person before retirement (and not drawing on it) just for health expenses in later years.

  17. partgypsy says:

    Thanks for sharing. It would be really cool if you had a graph of your income and your net debt/savings from past until now, so people can realize what is possible if they set their minds to it.

  18. Becky says:

    Just curious, why no goals for net worth? Also, I’d love to see an article about your retirement planning, even if you don’t consider it a “goal”.

  19. Beth says:

    Thanks for being so frank and open about your personal financial situation. It’s the sort of thing I wish I could discuss in my circle of friends, but I think of money as a really personal thing so my husband and I don’t have much to compare our situation to. We are debt free other than our home, saving for retirment, etc., and are always trying to do better and live more prudently.

    By the way – I know you’ve mentioned that you are religious, and I sense that you do give credit to God for your blessed life. However, I also believe that God expects us to do the best with what we have – “unto whom much is given, much is required” – and I admire your dedication to share what you’ve learned with others.

    Great post – thanks again!

  20. infix says:

    BigRed: take heart: the idea that debt is a good thing and that you should always tap the equity out of your home is quickly dying as the mortgage crisis unfolds… the music has stopped now and there aren’t enough chairs for everyone to sit in.

    Trent: just curious: why the focus on newer vehicles? You’re looking at spending around $30K on cars – wouldn’t it be better to just keep the ones you have and put that money towards the house first? Maybe replace only one of the cars? I have a paid-off house in part because I still drive a 20 year old-car (and my wife drives a 13 year-old car). Yeah, it’s old, but it still runs great and is quite reliable.

  21. BigRed says:

    Infix and $ plan–thanks! Didn’t mean to hijack the thread :) so I do appreciate the replies–and the encouragement!

  22. DivaJean says:

    My goals are very similar to others. I too am paying extra every month towards my priniciple on the mortgage- at the rate I am going, it will only be 8 more years ’til its paid off. I will then (hopefully) have 2 years free and clear to get ready for the onslaught of college for the 4 kidlets and our retirement which would in theory be a few years after the 4th finishes. I do not intend to completely fund their college years, but hope to come close enough that they can escape without too much debt load.

    We own one car now and intend to stay that way- it was bought (cash on the barrelhead) one and a half years ago and we will need to keep it in excellent condition to avoid car payments on a new one until our 4th kid is at least in kindergarten and hubby can pick up part time work to support buying a car. We do save and have our 2 month emergency fund plus- but keeping out of car buying is our biggest money saver. I bus daily- what it costs me wouldn’t ever pay for insurance on a second car, let alone gas and upkeep.

  23. Mark says:

    Trent,

    I like only have 2 posts per day, but I vote for posting them an hour earlier. Those of us on Eastern time don’t see your first post until 9 AM. I like to browse your site first thing in the morning when I get to work and I am still seeing yesterday’s post. Just a random thought. I love the site, and fewer posts are making for better discussion.

    I am just waiting for one of your really controversial posts to come out and stay at the top longer to see how many comments it can generate…lol.

  24. We are debt-free except for the house, so we are up to your Goal #3. Instead of prepaying on the house, we are putting it in a money market fund. When it reaches the payoff number, we will pay off the house at once. This reduces risk on our part at the expense of waiting an extra month to pay off the house.

    Fortunately, house prices in our area never took part in the bubble and are not taking part in the bust.

  25. atlas says:

    We are debt-free except for the house, so we are up to your Goal #3. Instead of prepaying on the house, we are putting it in a money market fund. When it reaches the payoff number, we will pay off the house at once. This reduces risk on our part at the expense of waiting an extra month to pay off the house.

    Unless the interest rate on your money market account is greater than the interest rate on your mortgage, it may benefit you more to go ahead and tap down your mortgage principal when you can.

  26. turbogeek says:

    I’ve only recently discovered your site — excellent stuff. I like your goals list. Too many people define ‘goals’ as ‘end points’, rather than the list of activities that will lead to success. Your approach is superb.

    For those trying to set a measure for “how am I doing so far” with regard to net worth, consider the metric used by the authors of “The Millionaire Next Door”. Your net worth should be roughly 1/10 your age times your annual realized income. For example, a 40 year old earning $40,000 per year should be able to net out to at least 40/10 * $40,000, or $160,000. In the book you are doing very poorly if you have half of that number, and you are a “Prodigiious Accumulator of Wealth” if you have twice that worth.

    I’m 37, and am just above their line for tracking well.

  27. Shevy says:

    @ Fecundity

    When I sold my condo earlier this year that obviously required paying off the mortgage in full prior to the end of the 5 year term.

    I paid 3 months interest as a penalty.

    One thing you could do if you want to pay down as fast as possible (and have the money to do so) is to pay the maximum annual prepayment now, and then pay the maximum again in January since the prepayment can be made (only) once in a *calendar year*, not once in every 12 month period.

    That gives you the biggest reduction possible in the amount of interest accruing each month so much more of your payment would then be going towards the principal.

    As for Trent’s situation, he wasn’t looking at paying it all off at once but rather at doing it over an 8 year period. So this method should work even if he had a prepayment penalty clause.

  28. Erick says:

    Hey Trent, this is Erick that you replied to. I really appreciate you being so open and honest. I actually never expected a reply back as I thought you might have thought I was being too nosey. You answering really made me realize how out of whack our finances are and hole we have dug ourselves into. To give you an idea, between my wife and I, we gross about 15K a month and by the time we pay all the bills, we have about $300 to spend on miscellaneous stuff. That’s it. How did we get here? One word. Divorce. Add to that a horrible Michigan housing market where we both own homes (one we have to rent just to pay the mortgage) and we are pretty much screwed. On a lighter note though, we started using the envelope system of budgeting and are starting to pay down debt a little at a time.

    Again, thanks a ton for your reply.

    Erick

  29. turbogeek says:

    I love hearing people mention that they are using an envelope system to pay down debt.

    What is even cooler is when those people get to the point they are using an envelope system to pre-save — – for EVERYTHING — and there is no debt.

    The best Christmas ever for me and my wife was in 1998 when we were debt free except the mortgage, and had an envelope pre-funded with $600 at the start of Christmas shopping season. That will be a feeling that is hard to beat.

  30. Jeff says:

    Making extra payments to pay off a mortgage early makes sense if you have a high interest rate and are likely to stay in the home for a long time (i.e., 20 to 30 years or your entire life). If you think there is a strong likelihood that you will eventually move (and your interest rate isn’t particularly high), then why be in a rush to pay off your mortgage early?

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