How to Set Financial Goals and the Work Needed to Get There: The Simple Version

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savings_nonna.jpgBecoming financially independent is about setting goals and staying on track in order to achieve those goals.  In my view, most Americans are in poor financial shape (i.e., living on credit, spending more than they earn,  not saving enough or at all, etc.) because they have not set financial goals, partly due to not knowing how to do so (that’s my great grandmother to the left, she knew how to set financial goals!).

In order to put your money to work you need to first prepare and set up your financial foundation and this includes:


  1. If you have debt, focus your full attention on paying it off (e.g., credit card debt, car payment, etc.).  You should be extreme here, suspending 401K contributions until you can element debt with high interest rates and living way below your means (remember you’re not entitled to a nice car, fancy clothes, and meals out just because you happen to live in North America).
  2. As soon as you eliminate your debt, then you need to stop the behavior that lead to it.  The type of behavior modification I’m talking about includes: living below your means (specifically, reduce expenditures on restaurants, clothes, electronics, iTunes, ring tones, and fancy automobiles), finding satisfaction in life on things other than spending money, moving away from friends who live “material-heavy” lives, etc.
  3. Set up a simple online Money Market Fund (Vanguard’s Prime Money Market Fund has a 2.76% monthly yield and it’s safe) and connect it to your checking account (and make bi monthly deposits until you have a 6 month emergency fund which includes 6 months worth of mortgage/tax payments and living expenses).
  4. At the same time you set up your Money Market Fund, start up your 401K contributions (assuming you’re debt free) and contribute enough to earn a company match (given that your company is still doing this in light of the current economy).  The current max on yearly contribution is $15,500 (max it out if you can).  Remember contributing to a 401K is done with pretax earnings and you don’t pay taxes until you begin withdrawing (so you’d be crazy not to contribute to your 401K even in light of the current economy).

Once you’re debt free, have six months of emergency cash available, and are maxing out your 401K contributions, you can NOW begin setting your financial goals and begin having your money work for you via:

  1. Buying individual stocks and bonds.
  2. Buying low cost index funds or other mutual funds (including Exchange Traded Funds or Exchange Traded Notes).
  3. Purchasing real estate that yields monthly income (a two family home, for example).
  4. Further cash savings in a conservative money market fund or savings account.
  5. Starting a business or consultancy.

I don’t like to talk about financial goals in terms of things like, “retiring early” or “being financially independent” because these statements do not mean anything and are not tied to a goal or a plan.  Rather, when you talk about financial goals you need to be specific and have actionable daily tasks that help you achieve your financial goals.

So, in summary, in order to get some money goals set up you need to first:

  1. Eliminate all bad debt (you can have a mortgage but it shouldn’t make up more than 25% of your take home pay each month, including property taxes).
  2. Stop the behavior that lead to accumulating debt and “material stuff.”
  3. Create an emergency cash fund and max out 401K.

Thereafter, go crazy with your financial goals, but remember they need to have actions and a plan behind them!

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