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04 Jan
2015

Jonna Marjorie

Admin Assistant
 

This post originally appeared on Forbes

 

Did you make New Year’s resolutions this year? Considering that the most common topics are health and finances, there’s a pretty good chance that at least one of them involves a financial goal. Unfortunately, there’s also a pretty good chance that any resolution we make won’t be kept. Here are some ways to make sure that you at least keep your financial ones:

1) Set SMART goals. When we set a vague goal like “save more money” or a seemingly insurmountable one like “pay off all debt,” we’ve already set ourselves down the path to failure. Instead, you want your goal to be SMART: specific, measurable, attainable, realistic, and time-sensitive. Instead of “save more money,” a SMART goal might be to save an extra $5,000 for emergencies by the end of the year.

2) Determine how you’ll invest for each goal. For goals to be funded within the next 5 years, you’ll want to keep your money somewhere safe like a bank account or stable value fund that just earns interest and doesn’t fluctuate in value. That’s because if you invest the money in something more aggressive like stocks, it could lose value and not recover by the time you need the money. The benefit of a higher return is also much less when the money has such a short time to compound.

For longer term goals, it probably makes sense to take some investment risk. Otherwise, you face the risk of having your purchasing power reduced by inflation. A 1% return with 2% inflation is actually losing 1% a year in real terms of what you can buy with that money.

Having just 20% in stocks can give you enough growth to at least keep pace with inflation. The exact percentage depends on your comfort with risk. You can use this short questionnaire for some guidelines on how to allocate your investments between stocks, bonds, and cash. Just keep in mind that your time frame is how long your money might be invested so retirement would be a long term goal even if you’re retiring in less than 5 years unless you’re planning to use the money to pay off your mortgage or purchase an immediate annuity.

The more you invest in stocks, the higher your expected return is in the long run. I like to estimate a 6% return for aggressive investors, 5% for moderate, and 4% for conservative. All are below the average long term returns to be on the safe side.

3) Calculate how much you need to save per month. For debt, you can use this Debt Blaster calculator to see how quickly you can be debt free by making extra payments towards your highest interest balance and then putting those payments towards the next highest debt once it’s paid off. For other goals you’re saving for, don’t forget that the cost of your goals will likely increase over time due to inflation. For simpler goals like saving for a down payment on a home, you can use a relatively simple calculator like this to see how much you need to save per month given a certain inflation rate and return on your savings. For more complex goals, you can use this calculator for retirement and this one for college planning. Just remember to use expected rates of return that match your time frame  and risk tolerance.

4) Look for tax-advantaged ways to save. Some examples are your employer’s retirement plan or an IRA for retirement. Coverdell Education Savings Accounts, 529 plans, and US Government Savings Bonds can all grow tax-free for education expenses. However, there are typically penalties if you withdraw the money for other purposes.

 

Source: http://goo.gl/Vz9F67

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