In my experience, people tend to fall in one of two camps with regard to their finances. The first type lives for today, attempting to enjoy life to the fullest now while sacrificing his or her future.
The second focuses on saving for the long term, sacrificing for their future, but often at the expense of enjoying life today.
Those “living for today” may not actually be enjoying life as much as they’d like, because of the nagging feeling there won’t be enough in their savings accounts if an emergency struck, or that they aren’t even close to being on track to retire someday.
According to 2013 research by Financial Finesse, financial stress is a common issue among working Americans: 83% of employees reported experiencing financial stress.
Trying to plan your financial life can feel like juggling too many goals at once, and you may feel like you’re not mastering any of them. One reason for this perception is that financial planning is an ongoing process, not something you can simply check off your to-do list.
This process can sometimes seem like endless drudgery that gets you nowhere. Think about the basketball player who is practicing free throws in his front yard. Practice makes perfect, as they say, but let’s face it: There is a big difference between practicing free throws and the intensity of a game.
The moment of truth comes when the game is tied, there are five seconds on the clock and you have the ball. The physics of sinking a shot in your driveway are the same as during that game, but the entire meaning and context changes when you’re under the pressure of a time limit.
How do you turn your attitude around so making money decisions is exciting and empowering instead of an obligation? How do we live meaningful, enjoyable lives instead of being stressed about money and worried about the future?
One way is to plan your finances in five-year blocks, rather than overwhelming yourself by looking at the rest of your life all at once.
I came up with this system when my cousin was diagnosed with leukemia in 2004, when he was 53 years old. His doctors estimated he had about five years to live.
As you can imagine, this diagnosis in the prime of my cousin’s life really made my husband and I think about our own lives. As a financial planner specializing in retirement planning, I’d always planned for 20 years or so down the road, both for my clients and myself.
When this tragedy struck, my husband and I sat down and wrote out what we would like to do if we had five years to live (and were healthy enough to do anything we wanted).
The five-year exercise is powerful. My husband and I revisit this every few years, and I walk my clients through it, too. I have found that the keys to success in shorter-term planning are to pick a specific timeframe and to plan your financial decisions around your goals.
When you have an exciting goal to work toward, like a big trip, then the day-to-day sacrifices don’t seem as bad. If you keep your dream trip to Machu Picchu in mind, eliminating unnecessary expenses and keeping your shopping budget in check doesn’t feel nearly as cumbersome.
How do you plan for multiple goals when they all have different timelines?
Here are a few ways to get started:
1) Be prepared for emergencies.
Set up a monthly automatic transfer from your checking to your savings for emergencies — an amount you are sure you can handle and then increase it when you can. Many financial planners recommend that you have three to six months of expenses set aside in a liquid account.
If you own your own business, or your work doesn’t have a lot of job security, shoot for nine months of expenses instead. This may be a daunting dollar amount when you add it up, but don’t let it intimidate you. Save whatever you can now and increase the amount you contribute each month to your savings.
2) Save for retirement.
Maximize your company retirement plan by taking advantage of your company 401(k) match. If you haven’t saved the maximum of $18,500 for 2018 (or $24,500 if you are 50 and over), set up your plan on “auto-escalation” so your contributions increase gradually—you’ll hardly notice the change.
If you don’t have a retirement plan at work, create your own. Open a Roth IRA (if you qualify) and set up an automatic investment of an amount you know you can swing (even if its $50 or $100 per month).
3) Sign a few important papers.
Get your estate documents up to date so you can feel confident you have your ducks in a row if something were to happen to you. Check your beneficiaries to make sure they are current. Set up a financial power of attorney as well as a medical power of attorney. Look into getting or updating a will or trust.
Here are some resources: Nolo.com and your company’s HR department (you may have a legal benefit through work.)
4) Do the “Five Year Exercise.”
Now that we have the emergency fund as well as long-term planning started, think about what you’d like to do in the next five years.
If you only had five years to live, what would you like to do, have and/or experience? Don’t overthink it or censor yourself. Just start writing it down. If you are married or in a relationship, you and your spouse should write your lists separately.
Narrow your list to your top three options, then choose one to set as a goal. If you are in a relationship, decide as a couple what you want to do together and what you want to do on your own, depending on what ended up on your list.
Keeping your financial circumstances and funding your other financial priorities in mind, choose a deadline to make this goal happen.
I suggest setting up a separate savings account for your goal. You can simply add another savings account at your bank earmarked for this goal and stash funds away. There are lots of online budgeting options, such as Mint or Hello Wallet.
You might be wondering what I chose when I made up my first list in 2004. If I only had five years to live, I wanted to beautify my home. My kids were still at home, and I spent most of my time there—our home was the place where the extended family gathered.
When we sold the house and did the final walk through, I thought of all the special memories created there. I was happy with my choice.
Making progress toward short-term, mid-term and long-term goals simultaneously can help you to enjoy your life to the fullest.
Now the question is, what’s on your list?
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