As we discussed in Tip #3–Think Small, sometimes our long-term financial goals seem impossible. The Think Small tip reminded us that no matter how big the goal, it is achieved in small, easy steps. Setting challenging, short-term milestones will help motivate us to the next level in whatever we do. In personal finance, milestones can help motivate us to make wise financial decisions, and give us an opportunity to celebrate incremental success along the path to financial independence. It’s kind of like the football announcer who yells: “He’s at the 50, the 40, the 30, the 20, the 10, TOUCHDOWN!” Well, we need somebody yelling for us, and that’s where milestones come in. So what should they look like?
Like so many things in life, there is no one right set of milestones. Each of us may have different milestones depending on our particular circumstances. Whatever our situation, though, effective milestones should cover in one form or another at least the following areas of our finances:
Part of a financial plan should include paying down and eventually eliminating debt. I suggesting separating goals between mortgage debt and non-mortgage debt:
- Non-mortgage debt: Rather than just having one long-term goal (e.g., pay off all non-mortgage debt by 2012), break the goal into yearly milestones (e.g., reduce non-mortgage debt by 10% by 1 January 2008). To reach this milestone, you could even set a monthly goal (e.g., pay an extra $250 over and above my minimum payments).
- Mortgage debt: Here, your goal may be having your mortgage paid off at retirement. To meet that goal, you may need do nothing more than make your regular monthly payments. If you want to pay off your mortgage earlier, however, in addition to a long-term goal (e.g., pay off our 30-year mortgage in 20 years), set yearly milestones followed by monthly goals to meet those milestones. Check out a nifty mortgage calculator here that can help.
Saving milestones should include at least two components: (1) an emergency fund; and (2) retirement accounts:
- Emergency Fund: An emergency fund should cover a number of months worth of living expenses. Many suggest saving 3 to 6 months worth of living expenses. Whatever your number, for many, it will take a long time to save this much, and milestones can help. Here I suggest milestones every six months (e.g., save 1 month’s worth of living expenses every six months). If you are able to put 10% of your gross income toward an emergency fund (yes, I know this is a lot), you’ll save about 1 month’s worth of take-home pay every six months.
- Retirement Accounts: Here, I set my milestones based on the percentage of income contributed to my 401(k). The ultimate goal was to contribute the maximum amount allowed by law. For me, that took several years to work up to. So setting milestones along the way (e.g., 5%, 10%, etc.) helped keep me motivated toward the that goal. At an absolute minimum, our goal should be to contribute enough to take advantage of any employer matching contributions.
You can create any number of milestones to help motivate you toward your goals. I’ve suggested a few that I have used. What milestones have you set up along your journey to financial independence?