Where do you see yourself in 5 years? Classic interview question right? Well, more specifically, where do you want to see yourself, financially in five years? Out of debt? Buying your own home? Having nicer cars? (Or just cars that you don’t have to worry about breaking down?) Actually having a savings account? If you don’t have some sort of goal then more likely than not five years will come and go and you’ll be no closer to these dreams.
Second question, do you know where your spouse wants to be in five years? Have you ever talked about it? Did you know that money problems are the number one reason that couples fight and/or get divorced? Crazy right?
What about God? Did you know that sixteen of Jesus’ thirty-eight parables were concerned with the handling of money and possessions?
No one can serve two masters. For you will hate one and love the other; you will be devoted to one and despise the other. You cannot serve both God and money.
– Matthew 6:24 (NLT)
So it’s kind of an important thing right? Well, you can’t fight about money if you agree about it. And you can’t agree about it if you don’t talk about it and know that you’re on the same page. So why not sit down with your husband tonight and have a little family meeting. Go over your budget. Set some goals for your future. Dream about where you want to be one, two, five, ten years from now.
Just get on the same page, and then get some goals on that page too.
What kind of goals? Getting out of debt, an emergency savings fund, paying off a mortgage, or saving for a house. Big purchases, repairs or replacements of things you need, new things you want, vacations. Retirement. Yeah, I know you might not even be 25 yet (I’m not), but yes, retirement. Your goals should be things that matter to you. Here are some of our goals.
Goal #1 – Retirement
Starting early (ahem) on any goal that you have gets you there faster. And with money it’s pretty much a snowball. Everything you do with your money is an investment of some kind. If you invest in paying off debt, you save exponentially on the interest depending on the size of the debt. If you invest in your retirement and savings (in an actual investment way, not just collecting interest) then the difference a few years makes in the long run can be staggering! Take a look at this handy little example from Dave Ramsey’s article “Teach Your Kids How to Save for Retirement”:
See what a difference this can make? (P.S. In case you’re wondering Dave Ramsey suggests you invest all that into a Roth IRA, which is then invest 4 different ways. He estimates it to have a return of 12% as an average over time. You can read more about it on here: Dave’s Investing Philosophy.
Goal #2 – Pay off Mortgage
So of course paying off your mortgage early saves you in interest right? But the question is how much? Is it really worth it? Let’s find out. I will be using my favourite mortgage calculator for this:
Don’t let the old school graphics fool you, because the flexibility of this calculator makes up for it. You can tell it exactly how much you want to add in extra payments, and you can set the interval to anything from bi-weekly to yearly to one-time. You can also set a start date for the extra payment and do more than one payment calculation at a time. So you can calculate your savings for a plan where you decide to pay an extra $25 on your mortgage every month, then an extra $100 for 6-months of this year, and an extra $1,000 every April when you get your tax returns. Anyways, now that I have sold you on this calculator, let’s do the math. *Puts on glasses and grabs handy-dandy calculator*
For the purposes of our calculations let’s assume:
- You have a 20-Year Mortgage
- The amount is $75,000
- Your interest rate is 4%
- This loan is new (meaning you haven’t made any payments yet, calculations are done on the full loan value)
So what happens if you decide to pay an extra… $50 a month on your mortgage?
You save $5,338.50 in interest.
You cut 34 months off your loan. That’s 2 years and 10 months.
So basically, on this loan amount and interest rate, adding $50/month to your mortgage payment will turn your 20-year loan into a 17-year and 2-month loan, and save you over $5,000.
What if you take the same loan values and change the extra payments. How about if you decide to pay an extra $100 per month, and then once a year (like maybe with your tax returns) you decide to just dump $1,000 extra towards what you owe on that mortgage. This is what happens:
You save $13,740.62. In INTEREST.
You cut 90 months off your loan time. That’s 7 1/2 years.
So this 20-year loan is now paid off in just 12 1/2 years. That’s almost half the time. Just by adding that $100/month and $1,000/year. (Which yeah, I get that that’s still alot, but you’re cutting off 7 1/2 years of debt.)
So, if you have a mortgage, punch in your numbers. How much would you save contributing an extra $50/month? How much extra can you contribute? Calculate it out! This is a really exciting area to invest because once you get that mortgage paid off you have an extra lump of cash in your pocket every month. You’re done with house payments, rent, etc. If you go back to our example mortgage, the base payment (not including any escrow accounts like insurance and taxes) is $454.49. (Plus if you are paying that extra $100/month then that’s $554.49/month back in your pocket.) So you sacrifice$ 100/month for 12.5 years, and then you get an extra $554.49/month for the rest of the time you live in that house.
Also a couple quick ways that you can sneak in that extra payment:
- You could use the bi-weekly payment method. This method works by splitting your monthly payment amount in half, and paying that amount every two weeks. This makes 26 half payments in the year, which is equivalent to 13 full payments. You barely notice it, but you make a whole extra payment each year.
- Round your payment to the nearest hundred and request that your payments be drawn at that amount with the extra payment going to principal. (So instead of paying $454.49/month, tell your bank to draw $500 every month and then send that extra $45.51 to principal.) This is an easy way to make sure your getting ahead even if you forget to deliberately make an extra payment, plus it makes your budgeting easier with that round number.
Some tips about the process:
- Check to see if you have early pay-off penalties. Yes, some banks charge you for being ahead of the curve… -_-
- Make sure your extra payments are going directly to principal. Make sure you follow up with this one too, because some banks will put the money towards next months payment until you have a full payment accumulated and then one month your automatic withdrawal won’t come out and you will wonder what happened… *ahem*. Also some banks can sneakily send that payment to interest. You want it going directly to the principal and nothing else.
Goal #3 – Savings (2 Kinds)
My husband, Zach, and I have 2 different kinds of savings accounts. One is “Emergency” or “Preparedness” Savings, depending on how optomistic you want to be, hehe. The other is what we like to call “Spendable savings. The difference (which may be obvious at this point) in what we can use them for. Emergency Savings has so far not been tapped into, and is only for really big emergencies. It has to be a big deal for us to reach into this account. Spendable savings (which has been used up and replenished quite frequently) is anything that fits into one of two categories: Unexpected Expenses, and Planned Expenses. So for examples…
- Hospital Bills
- Job Loss
- Expensive Car Breakdown (little things are budgeted in already and sometimes taken out of spendable savings.)
- Really Important EMERGENCIES
- Car Accidents
- Traffic tickets
- Small Car Repairs & Maintenence
- Replacing Appliances that go out (this happens rather frequently to us…we think our house has an appliance curse…)
- Things you forget to budget for (like car registration tags)
- Small vet bills
- Forgetting to account for a bill in your budget
- Home Improvements
- Family Outings (theme park tickets, date night, movies)
- Expensive things that you are saving for
Anyways, the point is that it’s good to have a savings that you don’t touch unless something crazy happens. Just keep growing this and hopefully you never need it. The other account is for things that you don’t expect but want to be able to take in stride, or that you forget to account/budget for. It is also for planned things that you know are coming or that you want to spend but don’t have enough saved yet. This account is okay to dip into for many different reasons. Think of it like this:
Emergency Savings – Calling 911… you call it if you need help now. This is big and needs your serious attention now.
Spendable Savings – Calling your parents to ask for advice. If they don’t answer it’s okay, you’ll just call later. Or google an answer. Or ask a neighbor. You’ll work around it and it’s not that big of a deal.
Obviously, it’s good to have a savings goal for each category, but how? For your emergency savings I like Dave Ramsey’s suggestion of starting with $1,000 and then aiming for 3-6 months of income. For the other, yes you should have a minimum savings goal, but it’s also a good catch-all for any money left in your bank account at the end of your monthly bill paying (accommodating for food and gas of course).
Goal #4 – Getting Rid of Debts
Personally, this is not something that we currently have as a money goal because we have no debts other than our mortgage. Our cars are paid for and Zach’s college was paid as he went, leaving no extra bills, and I didn’t go to college. So (by God’s grace) we don’t have any other debts to worry about. However, if you have some debt that needs to be paid off, I recommend these resources:
- Dave Ramsey’s Debt Snowball Method – Basically you take all your extra money and throw it at your smallest debt until it’s gone, leaving your other debts at their minimum payment levels. This builds momentum and a sense of accomplishment so you can follow through. Then you take whatever your payment was on that smallest debt, roll it together with the extra money you had been using to pay it off (snowball effect) and throw it at your second smallest debt, etc, working your way through all your debts until they are gone, each time building the amount you can spend on paying off each debt.
- Con: This method works best if your biggest problem is follow through, because the most fiscally smart method is to pay off your highest-interest debt first. However the wisest choice is getting out of debt, and this method caters to those who are struggling with the motivation and psycological side of that.
- Here’s a handy chart about the process. (I cannot find who this image should be credited to as it was a user upload on pinterest… Therefore you’ll have to link over to my pinterest to check it out to avoid copyright law violations. Sorry for the inconvenience!)
- The Stack Method – This is basically the Debt Snowball, but you pay off the highest interest debt first, making minimum payments on all the others. Also highly recommended.
Goal #5 – Non-Monetary Goals
Okay, last thing, these are more of discussion points to have with your spouse.
- You need to consider things that will cost alot money but that aren’t really money goals. Basically the things that you would save for in your “spendable savings” account. As an example, Zach and I are going to attempt to replace the windows in our home this year. This is a goal which are going to need to be fiscally prepared for. Vacations would also be a good example of something that would fit here.
- Spending Reduction goals – I.E. Spend less than $50 eating out this month, or lower grocery bill by $100. Eat leftovers for one week each month.
- Current budgeting pitfalls – lack of budgetting, don’t know where your money is going, figuring out what you can cut out to be able to start saving money
- Job goals. Are you in the job you want to be in in five years? Are you happy where you work? Does it make fiscal sense? Or are you just working there because it’s the first job you got and you need the money? Because it could be worth considering looking for a different job where you can advance and get better raises and benefits over more time. You will always be working a job longer than you expect to because it’s really hard to make the leap and change. Do you need a job with better job security? What’s most important to you and are you getting it at your place of work? Some things to consider:
- Hours (Both amount per week and what shift/days)
- Effects of it on your health
- Stress levels
- Do you enjoy it?
So there you go! Now then, schedule a dinner (or lunch) date with that cutie in your life, and talk about what you’re doing with your money, and where you want to be down the road.
- Write down your goals. This is super important. I’ve even made you a free worksheet for it so that you just print it out and make sure you don’t forget everything. It’s even formatted for you so it’s quick, easy and painless. Just subscribe below and you can download it!
- You also need to write down a plan to get there. Decide how much money you have available to contribute to these goals and decide on an amount. Talk about what you can cut out or be smarter about with your money so you have more leftover for these goals.
- And lastly, map it out. If you follow that plan where will it get you at this time next year? 2 years from now? 5 years from now?…10? Really write these down and calculate it out because then you will know what you’re shooting for and what the pay off is when you succeed! You will be able to point to this and say, “Okay… I’m not buying ‘xyz’ because that is gonna be so worth it!” and, “I’m committing to investment goal of $___ because it will let us have our mortgage paid off ___ years earlier.” You need to be able to see what results your efforts will have.
Now then, I have created a free workbook for you and your lovie-dearest to check out. It’s a quick and easy printable with a recap of things to discuss, a couple additional brainstorming questions, and a little chart to plot out those future financial successes. It’s totally free just for you! All you have to do is subscribe to my e-mail list, so you can know about more awesome things like this in the future!
I hope that your goal setting goes fantastically and that I was able to help you and your honey get those dreams on paper! 😉