When creating an easy to understand financial plan, every dollar needs a job. We craft the job description for our dollars by defining what we want our money to accomplish (financial goals) and planning the work for each dollar (spending plan).

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Financial Goals

Being the “nerd” in our relationship, I wrote my goal ideas and then my wife and I sat down and defined goals for our finances. We defined both short term and long term goals. You might add a “medium-term”, but we like to keep it simple and basically think of goals within the next 5 years as short-term and those more than 5 years out as long-term.

Examples of our short-term goals:

  • We will save $x each month for gifts for this year.
  • We save $x each month for annual bills the year before they are due (e.g., home/auto/life insurance premiums, real estimate/property tax).
  • We will save $x for new furniture in 2 years.
  • We will save $x for a dream vacation on our 25th anniversary (less than 4 years away…yay!).

Examples of our long-term goals:

  • We will maximize IRS allowed before-tax savings as well as after-tax savings for retirement each year.
  • We will save $x each month for our kid’s education (we have four kids, so we use a college savings calculator to determine the monthly amount needed).
  • We save $x for each of our boys and $y for each of our girls to help fund future weddings.
  • Give a designated amount to charity over our lifetime.
  • Achieve financial independence (income streams other than our employment cover our living expenses) before our target retirement age.
  • Leave a specific minimum amount to each of our children and their children when we pass away.

Spending Plan

With our goals in mind as a guide, we work to get a handle on our spending. We meet monthly to discuss our spending plan for the coming month. Our spending plan tells every dollar where to go before the month begins. This allows us to decide in advance how we will spend the money we have available each month. Our plan includes allocating funds to the savings goals like some of those listed above.

Using this approach, we are able to create a spending plan that works for our family. Having this plan helps us work toward our money goals in a predictable way (e.g., retirement savings, giving, paying debt, education funding, etc.).

Other Useful Resources

 

Having written financial goals and a solid spending plan are foundational to a strong financial plan. Planning is a key behavior to win with money.

This is a continuation of the series outlining key elements of our financial plan. See the first article here.

 

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Do You Give Each Dollar a Job?
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