1. Set New Financial Goals With Timelines
The basic financial security goals are similar for everyone. But beyond that, the plans you have for your money are all yours. What do you need and want in life? What is worth saving for next? Your answers to these questions can help you get started on financial goal-setting, the process by which you figure out which goals to focus on first based on what you want when you want it.
“We always have goals beyond [basic financial security],” says Blaylock. “It could be college savings. Maybe we’re looking to purchase a home [and need the] down payment. Or maybe it’s saving for something special, like a large trip, a wedding or a new vehicle. Those are some common ones I see. Some people even want to save up to start their own business. There’s always a next-in-line goal.”
Chances are you’ll find yourself making a list of multiple goals, and to help figure out which of them you want to start saving toward first, determine a timeline for each. For example, your goal could be saving at least $30,000 for a down payment on a home in the next five years or saving $5,000 for a vacation in two years.
“You want to determine, ‘What is your target date for that goal?’” says Blaylock. “Timing does have an impact on how much of our resources we want to devote to it.” In other words, if you have more time to save for a goal such as college for your kids, that goal might be less of a priority than saving for the house you want to buy in the next few years—unless saving for your child’s college tuition is, far and away, the most important financial goal you have.
Once you’ve determined what your savings priorities are, you can figure out how you want to allocate the dollars you have left over at the end of the month. And it’s usually better to save for more than one goal at a time, Blaylock suggests.
“You may decide that putting all $400 per month [that you have left over in your budget] into a particular goal is important, and there’s nothing wrong with that—but then you’re giving up on other goals,” says Blaylock. “It’s usually better to have a balance.”
Also keep in mind that you may have new life circumstances—such as the birth of a child, daycare, or taking care of an elderly parent—that could change your financial situation. If that’s the case, you may need to reevaluate some of the goals you thought you had and rework your budget. Working with a financial planner can help you come up with a strategy for reallocating your extra funds or help you find more room in your budget in anticipation of any big life changes.
2. Invest With Purpose
The word “investing” often conjures images of buying shares in, say, a brand-new tech start-up to see if it hits the big time—and can result in a big payout for you. But the reality is most of us probably don’t have money to throw into high-risk ventures, says Blaylock. “I always hate investing without a goal,” he adds. “In my world, there is no ‘play money.’”
So if you’re looking for other ways to invest your money beyond retirement, you should stop and think about what you want to grow your money for, what level of risk you’re comfortable with and the vehicles you have at your disposal—not all investing has to be done through a brokerage account. For example, you might save for college by choosing to invest in a 529 plan.
If you do opt to open a taxable brokerage account, you should consider investing only toward a goal that is five or more years away. If you intend to pull your money out sooner than that, a brokerage account may not be worth the risk because you may be forced to sell when the market is down—or you may need to put off your goal until the market goes up again.
How much risk you can afford to take is largely based on the timeline for your goal. “If we’re talking about college savings, investment makes perfect sense for the future. If it’s a goal to start your own business, investing doesn’t make much sense,” says Blaylock.
For those who work with a financial planner, consider talking to him or her about your risk preferences, time horizon and the specific goal you’re trying to reach so you can both come up with an amount of money you’re comfortable setting aside and investing each month.
3. Reward Yourself… but Don’t Go Overboard
All good behavior deserves to be rewarded, so once your basics are covered, treating yourself to a little something—such as a new iPad or a pair of designer jeans—can be used as a motivator for continuing down your smart financial path.
After all, the “extra” money you have left over when you don’t spend more than you earn—what Blaylock calls “free cash flow”—can be spent or saved at your discretion, so “it would not be terrible to use some free cash flow to treat yourself once in a while,” he says. That said, the important thing is to make sure these little splurges don’t occur every month so that they don’t get in the way of making progress on your money goals. In fact, consider using the splurge in tandem with the new savings goals you’ve set for yourself—when you’ve set aside your target amount three months in a row, feel free to celebrate with something special, within reason.
The other category of extra money, by the way, is a windfall, such as cash you receive from a tax refund, bonus or gift. This windfall could be another source of splurge money if you don’t want to use up your free cash flow to treat yourself. “With any windfall, we recommend taking 10% and doing something fun and using the other 90% to pay down debt or fund another financial priority, like additional retirement savings,” says Blaylock.
4. Do Good by Donating
Giving money to a cause that resonates with you, whether it’s protecting the environment or supporting your neighborhood shelter, reaps plenty of emotional rewards. It can also help you out come April 15, as the donations you’ve made by the end of the previous calendar year could offer up a tax break.
“I think [donating to charity] can be a great way for clients to spend some of their money. In my eyes, this is part of your flex spending,” or the part of your budget that you devote to variable expenses after you’ve taken care of your monthly fixed costs, Blaylock says. “This is no different than spending it on a new handbag, from a budgeting standpoint. However, I would argue the reward is much greater and could be tax-deductible.” And if you want to go the extra mile and make charitable contributions a monthly part of your budget, you can also consider building this into your fixed expenses, just like other bills you pay every month.
Just note that there are IRS rules for how much you can deduct and what types of organizations you can contribute to in order to get the benefits.
By Marisa Torrieri | Dec. 14, 2019
CWM Advisory, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of CWM Advisory, LLC. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of CWM Advisory, LLC.