Earlier today, I wrote about techniques for defining personal finance goals that you can reach by making them as specific and as realistic as possible. So, how do these techniques really apply to some real world personal finance goals? I took five of my own goals and spent some time working them out to make them more detailed and more accessible.
Buying A Chest Freezer
This is one of the first purchases we’re going to make when we get into our new home. Where I grew up, a chest freezer was a fundamental part of day-to-day life. We would store massive amounts of food in it – vegetables grown in the summer for the winter, and game caught in the winter for the summer. The cost of food acquisition for us was made much, much smaller because of this freezer.
So, let’s clarify this goal:
When? I would like to own the freezer by the end of September, so I have five months to get there.
What does it cost? The unit we are looking at costs about $600.
So, “I wish to buy a $600 chest freezer in September 2007” is the clear goal. From this goal, instead of the much more general “I want a chest freezer,” it is very easy to develop a plan with immediate milestones, something tangible that I can start accomplishing now.
Establishing An Eighteen Month Emergency Fund
I’m a big fan of emergency funds and I wish mine were much larger than it is. Currently, I have a fund that can supply four months worth of living expenses (note that this is not salary).
So, let’s clarify!
When? I don’t have a specific date for this to be completed, just that there is steady progress toward the goal.
How much? This amount must equal eighteen months’ of living expenses. I am currently estimating what I believe expenses will be at the end of this year, after the home purchase and the birth of a second child.
How much each week/month/year? Since I don’t have a firm finish date, I must establish how much I will contribute over a set period of time to give myself a workable metric. I plan on putting in $100 a week as a minimum for the time being.
With these factors, “I want an eighteen month emergency fund” becomes “I want to build an emergency fund with $100 a week until it contains eighteen months worth of living expenses.” Stating the goal this way gives clear short-term milestones right within the goal statement, making it easy to see whether I’m working appropriately toward the larger goal.
Taking A Family Vacation To Europe
My wife and I are planning a European vacation when our daughter is twelve. Although this goal is very far off, it is still in our minds. How can we really clarify this goal?
When? Right now, this would mean that our vacation would occur in the late 2010s.
How much? This is something that we plan to define with our children as they grow older, as we want their input throughout the process.
So, what can we do here? “I want to take a family vacation to Europe” becomes “I want to take a family vacation to Europe when my daughter is twelve and begin planning it as early as my son begins taking any interest in the idea.” Thus, we have a milestone to begin formally tackling the goal.
Buying A Dream Home
This is a big one, as we’re already envisioning our dream home even before our upcoming first home purchase. This goal has us already saving, and thus transforming the goal from “I want a dream home” into something more tangible and concrete was important.
When? No later than my 45th birthday, so 2023 at the very latest.
What? My wife and I have gone to extensive lengths to model exactly what we want, and we know that this will change over time.
How much? We’ve also done a careful cost estimation of the house and have a pretty good estimate of what it would cost today. Right now, we’re targeting a number of $300,000 to have at the time of the groundbreaking on this house. This, plus the value of our home, should be somewhat close to building what we want unless the housing market continues to grow astronomically.
So, instead of “I want a dream home,” I say “I want $300,000 toward a dream home by 2023.” This transforms a nebulous idea into something that I can develop an investing plan around.
Giving My Two Children Each A House Down Payment As A Wedding Gift
This will come roughly ten years after the purchase of our dream home, and thus we can clearly define the start date for working towards this goal as being when our dream home is finished. Since the “when” period does not start until then, this isn’t really a goal, but more of a dream at this point.
How do we separate goals and dreams? We’ll talk about that tomorrow.