I love goals — I’m a goal-setting guy. As Yogi Berra said, “If you don’t know where you’re going, you’ll end up someplace else.” The great thing about reading personal finance blogs is I can see how a bunch of different people are managing their money to achieve a goal, whether it’s early retirement or buying a llama farm or whatever. Also, let’s be honest, people in the offline world are weird when it comes to money. Face to face, many people get squirrelly and uncomfortable when talking about budgets and net worth. It’s a cultural taboo, it’s considered private. You don’t ask your neighbors about their their sex life, their strange-looking facial moles, or their net worth. Awkward silence will ensue.
So, on the vast interwebs, financial voyeurs rejoice! We are free to be honest about our finances and our goals, and everyone can follow along. It can be inspiring and funny and encouraging. Maybe even arousing to some readers, who knows? I hope not. Awkward.
Anywho … A smart personal finance plan requires having a goal, making a plan to reach that goal, and tracking progress. Is the plan working? Can it work better? If it’s not working, what needs to change — the goal or the process? All good questions that can only be answered by getting started. So here I go.
As I said in About Rich, I like my career and I earn a decent income. I’m not looking to grow a mustache and escape mainstream society, and I certainly don’t want to spend more time at my kids’ school. That’s why we underpay teachers! What I want is financial security for my family, the freedom to splurge on fun experiences, and the option to retire around age 55, if I feel like it. I’m starting with a retirement date rather than a number, because my job provides a pension that kicks in fully after a certain number of years worked. I’m not leaving that on the table. Also, at 55, my kids will be out of the house and (you’re dang right) in college. So anyway, let’s say 55.
At 55, I’d like to have a Net Worth of $2 Million. This will be, I think, around $1.5 Million in retirement accounts (401k / IRA) and $500K or so in investments. If I add that to my pension income, I think I’m set for life.
Since 55 is almost 15 years away, I want a shorter term goal as well, so let’s say $1 Million at age 45. For wiggle room, I’ll say anytime before I turn 46. That gives me 4.7 years to get there. My net worth right now is $562,880, so I have $437,120 to go, meaning I need to increase net worth by around $93,000 per year or $7,750 per month. Can I do it?
|NET WORTH TOTALS|
I started tracking my net worth monthly in September 2015, and since then I’ve averaged an increase of $6,731 per month. I was doing well and then in October the lines showing my current pace and my desired pace started to diverge. I’m a little behind the pace now. Thank you, international preschool!
So how do I think I can do $1,000 per month better?
I’m going to zig where other personal finance humans zag. Maybe you think I’m going to cut expenses and tighten the budget. Go to Financial Peace Community College and get yelled at by Dave Ramsey. No thanks! I like to drink wine, and not from a box! Mrs. Rich shops online! A lot! Mostly, we want to travel while we’re still young-ish and show our kids the world. So no, cutting expenses is not the plan.
The plan is to — prepare yourself for this shocker — keep working at our jobs.
We have some tailwinds in our favor. First, Mrs. Rich and I both got raises recently, so our gross income will go up by nearly $30k in 2017. That’s almost $2k per month right there, after taxes. The 401k match goes up as well. Second, the kids are heading to public Kindergarten next year, so no more paying $30k annually for child care / preschool. So we will easily meet this goal, right?
Uh, not exactly. Here are the headwinds. In the summer of 2017 we’re moving back to the East Coast and our cost of living will go way up. We want to rent a big 2 bedroom apartment in the city, and we also need 2 new cars. Yikes. Those are huge expenses.
My best chance is to max out our retirement accounts, at least as a starting point. I haven’t always maxed the IRAs, so that should be a priority. If I add to that some super conservative investment returns I get very close to $7,750 per month.
|MONTHLY ADDS TO NET WORTH|
|401k contributions + matching||$5,400.00|
|Amount needed for goal||$7,750.00|
I’m still short by $435 per month, or $5,220 per year. Too much to find in the couch cushions, too little to warrant canceling my Netflix. Or HBO. Or Showtime. Or NFL Game Pass. So should I take any action?
I’m tempted to do nothing and count on modest annual salary increases. But maybe I could automate this, David Bach Automatic Millionaire style. Digit style. If I set up an automatic transfer of $435 per month to my savings account, I wonder if I’d miss it? Am I so obtuse that I can trick myself into saving this money? Behavioral economics says yes. I’ll start with $500 — never hurts to have a buffer — and see what happens. If I can hit $1 Million early in my 45th year, I’ll be stoked.
I just thought of this plan while writing. Hey, this blog is already paying off!
Penny, what do you think of this plan? How do you plan on reaching your longer term financial goals? Readers, what are your ideas for an easy way to earn or save an extra $500 per month?