Short Term Goals are the Bridge to Long Term Wealth
By: G M Potter
Tags: Savings Plan, Financial Planning, Money, Smart, Wealth

Financial planning can mean just about anything, depending on who you speak with. Some people are planning to retire early. Others have children to send to college. While still others are focusing on intermediate goals like buying a house. If we tried to pursue all the financial goals that are important to us right now, we would never get anywhere with any of them.

For many people, a comprehensive financial plan simply doesn’t work.

Unfortunately, this comprehensive approach is how financial advisors are trained, and it is how they begin their careers. They lay out a comprehensive plan for a client, and somewhere in the middle of the presentation, the client’s eyes begin to gloss over; perhaps they even manage to mumble their understanding incoherently and leave the meeting with a beautiful financial plan that becomes impossible to follow.

The more experienced financial advisors out there have learned from this experience. As a former financial advisor myself, I would often postpone creating a formal financial plan until one, two, or three shorter-term goals are reached, specifically, short term goals that create a foundation. These foundation pieces need to be accomplished before the bigger goals can even be considered.

What are the fundamental goals, the foundation pieces, of a lifelong financial plan?

Frankly, these are the un-sexy parts of financial planning, but they must take priority over the more glamorous pieces. Planning stock investment portfolios, or small business protection planning, or legacy planning sound great and are of a large scope. However, they are reserved for clients who can afford to carry them out and who have already established their foundations.

The un-sexy parts are things like adequate cash reserves, workable and livable budgets, and debt elimination. Once these pieces are complete, retirement planning can be discussed and planned for.

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Even within the category of foundation goals, there are many to choose from.

You must decide on some course of action. Doing nothing will get you nothing.

If you and I were sitting down somewhere, face to face, I would begin by asking you about your foundation. Have you set aside some extra cash in case of emergencies? If not, this is the first place to begin. If you have already done this, we will talk about any debt you still have and begin planning to eliminate it.

If you have paid off all your debt already, we need to focus on your spending and earning. This involves a budget but not just any budget. The budget needs to be livable for you, or you simply will give up on it at some point in the future, and our time has been wasted.

Fundamentals are what no one talks about. Talking about stock portfolios and home buying are much more fun.

Set your sights on a foundation goal. One of the three I have mentioned above would be great places to start your financial life and will create a bridge to the more dramatic financial achievements waiting for you.

Let’s say, for example, you want to set aside some cash in case of emergencies. Wise move. I have already written a story on savings accounts (The Myth of the Underperforming Saving Account), which may be of some help.

To summarize this story, the savings account at your bank seems to be an awful place to invest your money. And it is. Savings accounts are not about investment, however. They are about reducing some expenses, planning for the unforeseen, and covering expenses if something happens to your income — such as losing your job.

To drill down on this short-term goal even further, putting aside three months' worth of your expenses may be too much for some people as it would take months, if not years, to accomplish. Instead, set your sights on a target that can be hit within two or three months.

For example, setting aside $500 in savings accomplishes several strategic aims. First, and depending on your bank’s requirements, it may eliminate any monthly fees in your checking account, which saves money — please check with your bank.

That savings account is a better earner than you have been led to believe.

Having this amount in savings also does something extremely important. If this savings account is tied to your checking account, it can be used to cover overspending. We all know what happens when we overspend from our checking accounts. The bank usually pays the withdrawal, your account shows a negative balance, and the bank then charges you an NSF fee (Non-Sufficient Funds). This fee can be anywhere from $20 to $35. The national average is $24.

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Here’s the most interesting part of this. Most people will claim that savings accounts earn next to nothing and should be avoided. and they would be right. According to the FDIC, the national average is 0.05%. That is almost as close to nothing as you can get.

The interest earned from a savings account is not the whole story.

In the above example, if you were to avoid an NSF charge for $24, just once in a year, the savings account has effectively earned 4.8% annualized — your net worth has not been reduced by $24. Not bad for a small investment. Forget to balance your checkbook again, but still have the $500 in savings as a backup, and guess what happens. It saves you from that $24 fee again.

So, how do you put together a $500 savings account if you are struggling to make ends meet already?

You have two choices: you can either spend less or earn more. There are no other options unless you have a wealthy uncle who can give you the money (I didn’t think so. I don’t have a wealthy uncle either).

Spending less is an obvious choice. You can begin by eliminating all expenses that are simply, and honestly, not necessary. Groceries are necessary, but where you buy them, and ultimately, what you pay for them is not. Doing without the expensive coffee once a day, on a temporary basis until the savings account is created can also be a target to eliminate expenses. The details are up to you.

Getting brutally honest about your expenses can be freeing. And lucrative.

Earning more is a viable option for many people. Call it a side-hustle or a second job; the result is the same. You are trading your time for extra money. Is there an opportunity for you to work an extra 10, 15, or 20 hours a week? If you found such a side-job, paying $12 per hour (an example only) and you worked 15 hours a week, you would probably see a month-end paycheck from them, after taxes, of approximately $500. The goal is complete in one month.