" Good plans shape good decisions. That's why good planning helps to make elusive dreams come true." Lester R. Bittel, The Nine Master Keys of Management.Most of us who are interested in Personal Finance have well defined short term financial plans. Many, like myself, have a short term plan to get out of debt. These short term goals are great because they take a relatively short time to accomplish, and because we are all influenced by the lure of instant gratification, this allows us to use that desire in a positive way.
There is also tremendous value in long term planning. I find that often it is my long term financial plans that keep me inspired to stick with my short term ones.
Write out a list of your long term goals.
There is something magical about writing things down. When you write down a goal, you are more likely to achieve that goal. The simple act of writing something down can magically transforms a wish into a goal.
Your financial goals could include anything you want to accomplish in the future that will require money. This could include paying for yourself or your children to go to college, paying for your wedding or your children's weddings, paying off your home mortgage, saving for retirement, buying a vacation home, or even traveling around the world. Whatever financial plans you have for the future, write them down.
Decide on a time frame for your goals.
Next to each of the goals you have outlined, write down the year that you would like to achieve the goal. If you have a ten year old daughter and you would like to pay for her to go to college, you will need the money for her first year of tuition by 2018. So, next to the goal of "pay for daughter to attend college" you would write in "2018". If you would like to pay for your children's weddings, you could estimate that they might get married at age 26 and write in the corresponding year.
Figure out the amount of money you will need for each goal.
You probably won't know the exact amount of money you will need for each goal, but write down your best estimate. (There are also a lot of on-line resources that can help you figure out how much some things might cost in the future. A good resource to determine the future cost of a college education is available at The College Board website.)
Plot your goals on a time line.
It can be very helpful to do out a time line of the next 30 or so years of your life. Plot out all of your financial goals on the timeline along with the amount of money required for each goal. In this way you can clearly see how much money is needed and how much (or little) time you have to save for it.
Here is what my "Major Life Expenses Timeline" looks like.
Our major plans include paying off our debts, saving a fully funded emergency fund, paying off our home mortgage, sending each of our 3 daughters to college, paying for each of our 3 daughter's weddings, and retiring with enough money to live off our investments at age 65.
2008
2009 - (May) Debts Paid off ($36,000)
2010 - (June) Fully Funded Emergency Fund ($30,000)
2011 -
2012
2013
2014
2015 - (Sep) DD1 College-1($54,000)
2016 - (Sep) DD1 College-2($54,000)
2017 - (Sep) DD1 College-3($54,000) + DD2 College-1($54,000) = ($108,000)
2018 - (Sep) DD1 College-4($54,000) + DD2 College-2($54,000) = ($108,000)
2019 - (Sep) DD2 College-3($54,000)
2020 - (Sep) DD2 College-4($54,000)
2021 - (Sep) DD3 College-1($54,000)
2022 - (Sep) DD3 College-2($54,000) + DD1 Wedding ($40,000) = ($94,000)
2023 - (Sep) DD3 College-3($54,000) Pay Off Mortgage
2024 - (Sep) DD3 College-4($54,000) + DD2 Wedding ($40,000) = ($94,000)
2025
2026
2027
2028 - DD3 Wedding ($40,000)
2029
2030
2031
2032
2033
2034
2035 - DH Retire at 65 ($1,000,000)
Next determine the amount of money you might be able to save for each event.
You won't be able to guess everything precisely, but you can get a pretty good idea of how much money you'll be able to save before each event.
If you are starting out in debt, you can figure out how long it will take you to pay off your debts by using a debt snowball calculator. When you are ready to begin saving you can use a savings calculator to determine how much money you will be able to save before your next big event. Each time that you do the calculation, use the length of time that you have before your next event. Then subtract out the amount you use for the big event, and calculate again using the length of time you have until the next event.
When determining what interest rates to use for your calculations, you will need to make note of how much time you have before you will need the money. If you do not have a lot of time (like less than 5 years), you should count on a lower interest rate, like maybe 5%. If you have more time, you should be able to use a higher interest rate. (I used 10% when I had more than 5 years to save. According to Dave Ramsey you can expect this type of return on long term mutual funds.)
Enter the amount you believe you will be able to save onto the timeline in bold.
This will show you whether or not you will be able to reach your goals with the amount of money you project you'll be able to save.
Here is my timeline with my projected savings in bold:
2008
2009 - (May) Debts Paid off ($36,000)
2010 - (June) Fully Funded Emergency Fund ($30,000)
2011 -
2012
2013
2014
2015 - (Sep) DD1 College-1($54,000) {$252,340 - $54,000 = $198,340}
2016 - (Sep) DD1 College-2($54,000) {$261,849 - $54,000 = $207,849}
2017 - (Sep) DD1 College-3($54,000) + DD2 College-1($54,000) = ($108,000)
{$272,438 - $108,000 = $164,438}
2018 - (Sep) DD1 College-4($54,000) + DD2 College-2($54,000) = ($108,000)
{$224,100 - $108,000 = $116,100}
2019 - (Sep) DD2 College-3($54,000) {$170,276 - $54,000 = $116,276}
2020 - (Sep) DD2 College-4($54,000) {$170,472 - $54,000 = $116,472}
2021 - (Sep) DD3 College-1($54,000) {$170,690 - $54,000 = $116,690}
2022 - (Sep) DD3 College-2($54,000) + DD1 Wedding ($40,000) = ($94,000)
{$170,933 - $94,000 = $76,933}
2023 - (Sep) DD3 College-3($54,000) Pay Off Mortgage {$126,644 - $54,000=$72,644}
2024 - (Sep) DD3 College-4($54,000) + DD2 Wedding ($40,000) = ($94,000)
{$154,073 - $94,000 = $60,073}
2025
2026
2027
2028 - DD3 Wedding ($40,000) {$412,637 - $40,000 = $372,637}
2029
2030
2031
2032
2033
2034
2035 - DH Retire at 65 ($1,000,000) {$1,412,749}
What if you won't have enough money to reach your goals?
If you determine that you will not have enough money, don't be discouraged. It is better to find this out now than at the time of the event. You can decide to make some different financial choices (spend less or earn more), or you can decide to revise your goal (maybe pay half of your children's college costs).
Take some time for long term planning. If you do you will have taken the first step to "help make elusive dreams come true".
This article has been included in the Carnival of Personal Finance #136 over at Green Panda Treehouse.
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