Episode 8 - Setting Financial Goals and Checkpoints

Links:

Investment Calculator:

https://www.calculator.net/investment-calculator.html

 

4% Rule Resources:

https://www.kitces.com/blog/bill-bengen-4-percent-rule-safe-withdrawal-rates-historical-returns-research-book/

https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/

This week, I’m going to talk about how to start planning out your financial future and start making some goals toward your first $100K as well as checkpoints well beyond that.

First though, I need to announce the winners from last week’s contest.  Congratulations to Drew in Missouri and Dom in California!  I’ll be getting their books sent out this week.  One will get a copy of I Will Teach You To Be Rich by Ramit Sethi and one will get The Total Money Makeover by Dave Ramsey.

 

Let’s talk about the check[points we’re going to calculate real quick.  In Episode 6, I talked about these, but I’ll recap and expand here.

1. Net Worth Ground Zero - Where you are now: Calculate your Net Worth
2. Head above water - Positive Net Worth: Once your net worth is more than Zero. You may already be here, but if not, this is a really important and exciting milestone.
3. $100,000 Net Worth
4. $100,000 of investable assets: This is different from net worth. This is all your appreciating assets in investment or retirement accounts.  IRAs, 401ks, brokerage accounts, etc.  For me this is our TSPs, Roth IRAs, and investment account.  Technically, the 529 we started for my son falls in this category, but I don’t count it because I consider it his even though it’s technically in my name.
5. Pinnacle Point – There are a few different ways I’ve seen this before.
   1. When your money makes more than you contribute
   2. When your money makes more than you can contribute to retirement accounts per year (401k contribution limit)
   3. When your investments make more than your annual salary each year
      
      The pinnacle point isn’t anything anyone is likely to ask you, but I think it’s good to use one or all three as checkpoints along the way. It’s much easier to stay motivated if you have more things to shoot for.  Plus, that’s just really cool to see how your invested money starts doing more and more for you!
6. F-U Money: This is when you can say no to just about anything AND MEAN IT!  If you can live on your savings for a year or more without affecting your financial journey too much, you’ve pretty much made it here.  This can mean different things to different people, but that’s what it means to me – no longer having to do anything I don’t want to.
7. $1 Million net worth
   1. When you hit this one, it’s cool because you can say you’re a millionaire. Pretty Cool, but you may or may not be done at this point.
8. Financial Independence: This is what a lot of people call your FI number.  Really, this is just how much you need to retire.  To get this number, the rule of thumb is to take your annual expenses and multiply by 25.  This is based on the 4% rule created by Bill Bengen.  If you want to learn more about that, I’ll link to some resources in the show notes.  The 4% rule is just a rule of thumb.  There has been a lot of research suggesting that market conditions may allow for higher withdrawal rates and you can adjust this over time.  Long story short, it’s still a good rule of thumb.  If you are planning on retiring early, you might want to use 3.5% which is 28.5 times your annual expenses.  Don’t get too wrapped up about this, it’s kind of arbitrary.  The only reason why I talk about it is because we need it to chart out some of the other checkpoints along the journey.  The 4% rule makes sure you don’t run out of money based on all historical 30-year periods – including the great depression.  You are extremely safe to plan of being able to withdraw 4% in retirement.

Keep in mind, you might hit these different points in a different order.  You may already be past some of these checkpoints.  We won’t know until you calculate your net worth and see for yourself.  Refer back to episode 6 or my youtube channel for more info on calculating your net worth.

 

So, how do I decide what these goals look like for me?  Great question!

Start with your current expenses – everything you spend per year.  If you don’t know, that’s the first thing we need to address.  If you know you spend everything you make, then your annual pay will work for now, but you need to know how much you’re spending.

Now that you know how much you spend per year, you can calculate your FI number:  25 times annual expenses (or roughly 28.5 for early retirees or FIRE folks).  Keep in mind, this is a rule of thumb.

Now, you can punch this into the investment calculator at Calculator.Net.  I like using theirs because there aren’t many adds and most importantly, it shows a spreadsheet by year.  This is where we can get some of our other checkpoints along the way.  I’ve put a link to this calculator in the show notes.

You’ll have to play around with the numbers to get your monthly contribution figured out.  The default shows a rate of return, you don’t have to use this, but I wouldn’t use super high numbers.  I also won’t give you a number to use either.  Anything between 6 to 8 is probably pretty safe.  You should play around a bit just to see how much a difference it makes.

Once you have the calculator dialed in, you should be able to see at the spreadsheet at the bottom.

Look at the end balance column.  That’s how much will be in your accounts.  If you don’t have any debt, this is easy, just look at the years you’ll hit each target.  To see the different pinnacle points, you want to compare the interest column for each year to your checkpoints to see when your money will start making more than you can contribute and then more than you make in a year.

If your net worth is negative, then you can look at which year the end principal column would bring your net worth to Zero.  For instance, if your net worth is a negative $50,000, then the year that your balance will hit $50,000, you’re zeroed out and are moving into a positive net worth.  You can use this spreadsheet to see what year you should hit each goal.

Write these down!

Share your goals with others.  You can go to our Facebook group for this too.  It’s a private group and is a judgement free zone.  We’re all in this together!

 

What if I “Can’t” contribute enough to reach my goals?  Well, you have 3 options:

1. Make more
2. Spend less
3. Change your goals

I’’ll talk about these in a later episode, but if the math doesn’t work out, you’ll have to make some adjustments.

If you need help, reach out.  Post in the Facebook group or email me at [email protected]

To Recap :

1. Net Worth Ground Zero - Where you are now
2. Head above water - Positive Net Worth
3. $100,000 Net Worth
4. $100,000 of investable assets
5. Pinnacle Point – one, or all three if you’d like
6. F-U Money
7. $1 Million net worth
8. Financial Independence

 

Action Items:

1. Start outlining your goals on your journey. We’ll take a deeper dive in later episodes, but it is critical to have goals.
2. Share the podcast and subscribe so we can complete this journey together!

 

Check out our Facebook group and connect with others on their journey to financial security and independence!

To contact me, please email [email protected].

Now go get started!

Before you go, please remember this information is for educational and informational purposes only.  Please seek tax, legal, or investment advice before making any decisions.