How to Reach Your Long-Term Financial Goals (and Set the Right Ones)
This blog post was originally #inspired by a question that (seemingly) came out of the blue in an interview:
“If someone wanted to save $50,000 over the next two years to buy a house, how would you suggest they go about that goal?”
Questions like this always feel a little…funky, because it seems as though we did not pass go, did not collect $200, and did not set the stage whatsoever for why this is the goal (or for whom).
After all, someone who makes $50,000 per year is going to have a much harder time accomplishing this than someone who makes $500,000 per year, and—as such—their approaches would be different.
After thinking about the best way to answer this question, it forced me to nail down a framework for tackling goals that can be applied to pretty much anything:
Lucky for you, I even made it cute ‘n memorable: The 3 R’s of reaching financial goals.
Is it the right goal?
Is it a realistic goal?
Is it a reachable goal?
“Realistic” and “reachable” sound similar (I had to stick with the “R” theme, you know?), but they’re intended to represent totally different aspects of the goal-setting (and goal-achieving) process.
Let’s use the prior example to illustrate how this framework works: Saving $50,000 for a house in two years.
First question: Is it the right goal?
*Everyone who’s familiar with my rent vs. buy discourse ducks and covers*
Fear not, dear Rich Girls and Guys, this isn’t about to turn into an anti-ownership diatribe (though…if you want…). Instead, I want to look at the numbers and assess whether it’s the right goal.
For starters, is it absolutely necessary to put $50,000 down for the home?
“There’s certainly a balance to be struck here, but it’s worth double-checking that your perception of what’s necessary is accurate. Make sure you’re setting the right goal.”
For example, if it’s an investment property that won’t be owner-occupied, there’s typically a 25% down payment requirement—which means the $50,000 down payment would be necessary for a $200,000 property.
But if this is just a home-ass home that you’re going to live in, it’s possible you don’t need to put down a full 20% or 25% if you’re comfortable with PMI (private mortgage insurance), which acts as insurance for the loan. PMI, after all, isn’t that big of a deal if it allows you to snag a good deal, take advantage of a low rate, or even just makes it possible for you to have less money tied up in your primary residence. (Just make sure that the PMI will come off the loan once your equity eclipses 22%, as I’ve heard some lenders make it a permanent function of your payment.)
This same logic applies to setting emergency fund goals, too: If you’re trying to hit six months’ worth of expenses before you start investing because that’s the arbitrary number someone handed you, it might be worth revisiting whether or not you really need six months’ worth of cash in the bank.
So: Is $50,000 necessary? Is that the right goal? Maybe you’re trying to buy a $1mm stunner with $50,000 down. In that case, yeah, it’s probably necessary (or maybe a bit low), but (in normal housing markets) you can put down as little as 3.5% in exchange for a higher monthly mortgage payment and PMI.
I think there’s certainly a balance to be struck here, but it’s worth double-checking that your perception of what’s necessary is accurate. Make sure you’re setting the right goal.
Second question: Is it a realistic goal?
This is always the buzzkill question, but it’s worth asking: Am I setting myself up to fail?
For example, if I know that I make $50,000 per year and my annual expenses are $40,000, then assuming I can stay the course and hit $50,000 in savings in two years is simply not realistic. I’ll only hit $20,000 if I stay the course, in this hypothetical vacuum where taxes don’t exist.
It sounds silly to state explicitly, but this is the step of goal-setting (and achieving) that people often skip—they don’t run the numbers to see if what they’re trying to do even makes sense.
To extend this example—someone who earns $50,000 and spends $40,000—this person would need to either (a) cut their expenses by $15,000 ($1,250 per month) or (b) increase their income by $15,000 (or some combination of the two) in order to have a chance at saving $50,000 in two years.
“It’s easy to dream big—but running the numbers grounds you in reality and shows you where you’d need to either cut back, earn more, or do both to make it happen.”
If this hypothetical Rich Girl just named “$50,000 in two years” as the goal without taking a step back to plot out how that would actually happen, she’d probably skid into home plate with $20,000 two years later and feel confused about why she fell short.
Sometimes just adding numbers around a goal helps clarify how it can become realistic. After all, this person—who earns $50,000 per year and spends $40,000—could cut their spending by a more moderate amount ($625/mo.) and increase their income by the same amount ($625/mo., or $7,500/year—a 15% increase, or the average bump from switching jobs, ironically) and have no trouble saving $50,000 in 24 months’ time.
To use another example: Our net worth goal by the end of 2022 was originally $1.75mm. When I set the goal, it seemed totally in reach, but after stepping back and running the numbers, I realized it might not be reasonable at all.
If we hypothetically have around $1.1m in May 2022, that means we have seven months to add $650,000 to our net worth (to say nothing of making up for market downturns along the way).
If the stock market ends up cruising this year (unlikely, given its current state), it’d be possible—but that’s adding money at a rate of $81,000 per month. Not exactly in reach unless we strike it lucky with a scratch-off, and our “stretch” goal should probably be closer to $1.5mm.
It’s easy to dream big—but running the numbers grounds you in reality and shows you where you’d need to either cut back, earn more, or do both to make it happen. Make sure your goal is realistic for your current situation (or allow it to guide you to make the proper changes).
Third question: Is it a reachable goal?
On the flip side of the first question’s analysis about $50,000 potentially being too much, it’s important to consider that a home that requires a $50,000 down payment today may go up in value by the time you buy it in 2 years.
If the home appreciates by 5% per year, it’ll be worth ~10% more by the time you go to buy it—and your down payment will have to be up-sized proportionally. Nobody knows this painful truth more than people who started saving for a home in January 2020 for a home they planned to buy in 2022 (though I maintain, this market is really, really unusual).
“Having a ton of money sitting in a brokerage account will give you options, especially if you’re flexible about your timeline. ”
This is why I’m personally such a raging fan of taxable brokerage accounts (like Betterment’s “General Investing” or “Big Purchase” accounts that are tied to a goal’s timeline) as a place to store wealth as you go. Even if you don’t know what type of house you plan to buy (or when), having a ton of money sitting in a brokerage account will give you options, especially if you’re flexible about your timeline.
(To be clear: If you will rage-streak through your landlord’s yard if you don’t get the house you want on the exact timeline you want it, the brokerage account may not be for you. Flexibility is the key word here; you’d have to accept you’re risking your down payment shrinking by 20 or 30% for the chance at growing it by 20 or 30%.)
“Reachable” goals are ones that account for these types of nuances—so by the time you reach the goal, you’ll actually be able to fulfill the goal’s intended purpose (in this case, the goal is $50,000, but the real underlying goal is “down payment for a home”). Check for nuances to ensure your goal allows you to reach what you’re actually trying to achieve.
Striving for financial goals before you even have them
This entire conversation is a testament to why my preferred method of financial goal-setting is reaching for goals before you even have them. In other words, strive for broader financial benchmarks that’ll provide optionality later.
“Buy a house” has not ever been a goal of mine, but because we’ve had broader, more flexible goals (“build wealth & become financially independent”), we’re now in a position where we could buy a house.
“Strive for broader financial benchmarks that’ll provide optionality later.”
I know a lot of people (including me!) that emphasize the importance of having goals for your money, but sometimes I think it can force us to be a little too specific—I want to buy a house, or I want to eventually send my kid to college. If you realize you want to buy a home and then start saving, you’re going to be waiting a while—whereas if your goal is merely to amass wealth regardless of what you eventually use it for, you increase the chances you’ll have what you need when you realize what you want.
Same goes for the whole college thing—you may start seriously thinking about wanting to send your kid to college when they’re 10, and now you’re attempting to balance saving for retirement, paying for their overpriced basketball league, and investing in their college fund all at once. If you focus on “building wealth” more broadly from day one (meaning, before the kid is even born), you’ll likely have enough to pay for college outright by the time they turn 18 (because…compounding).
So while this article was about how to assess a goal, it might be fairer to say it’s about not setting specific goals at all
Building wealth across your qualified (read: retirement) and taxable accounts before you’re in a position to want anything major is—paradoxically—one of the best ways to guarantee you’ll actually be able to get it. In doing so, you put time on your side. Waiting until your goal is crystal clear to begin working for it means unnecessarily delaying the compounding.
We tend to overestimate what we can accomplish in one year, but underestimate what we can accomplish in 10. Start today for whatever Future You’s going to want 10 years from now (even if you’re not able to answer the 3 R’s questions yet).
