Last week, I (Dawn) was reading a post at my favorite personal finance blog The Simple Dollar authored by Trent Hamm. The post is called “Out with the Old, In With The New: Create a Five Year Sketch,” and I thought the ideas would be a good complement to our previous discussion on setting your financial goals.


The post is the second in a series about how to prepare for a great 2011. It emphasizes that looking ahead at the next five years and deciding now how you want your life to look can really help you decide what needs to be done today to make that happen. But make sure to be realistic (we would say it’s okay to dream big, but set realistic/obtainable goals). And this isn’t just about your financials. Take a look at your life as a whole and think about the following (quoted from The Simple Dollar):


“What will your job be like?
What will your family be like?
What will your physical appearance be like?
What will your home be like?
What will a typical day be like?
What will you be looking forward to?
What will your social circle look like?”


As we talked about in our financial goals post, having your goals planned out and written down where the can be reviewed can really go a long way to help you achieve what you set out to do. That way, you can always go back to track your progress and decide what needs to be done next. So, even if in five years you haven’t reached every goal you set for yourself, you’ll definitely be much better off than you would if you hadn’t thought about your goals at all. Plus, it can be fun to think about all the possibilities the future can hold.


In our talk about goals, we touched briefly on the idea of financial independence. It’s often stated as a goal that people wish to reach before they retire. While we said it was a great goal to have, and it is, financial independence can be complicated and personal. There is no magical number that once you reach it, you are financially independent. It very much depends on your personal situation and what you expect from retirement.


Financial independence means having enough resources to be able to live without help from anyone or anywhere else. But “living” is very relative and everyone will have different expectations as to how they should be able to live in retirement.


Each situation will be different. If you’ve maxed out your retirement plans and paid off all of your debt, it would be safe to say you are much closer to achieving financial independence than someone who invests little and has a $300,000 mortgage. But often the distinction can be much less obvious. How are you to know what financial independence looks like in your life?


Don’t get too obsessed with a number (I’ll be financially independent when I have $1,000,000). There is much more to it than that, and you have to decide on your expectations. Do you expect to live the same lifestyle as you were when you were working, therefore needing to produce the same income? Do you expect to downsize and cut expenditures to match a smaller retirement income? Do you expect to travel? There are a lot of things to consider.


One thing that should be a major consideration is debt. Entering retirement with a debt load (especially a mortgage) can have a big impact on the potential for financial independence. Having to pay down debt with the extra pressure of not bringing in income through working is not a good situation to be in. You should consider paying down your debt while you are working or making a change as you enter retirement (selling your current home to pay off the mortgage and downsizing to a place you can afford to buy outright).


If financial independence is your goal, take some time to decide what is important to you and how you expect your retirement to be. Once you do that, you’ll have a much clearer picture on how to achieve it.

In order to have a good financial life, you must know what you are working towards. People who move aimlessly through their financial lives with no clear goals or plans won’t be very likely to have a comfortable financial situation.


Setting Your Goal

There are unlimited possibilities when it comes to setting your financial goals. And no two people will have exactly the same goals. It’s a matter of personal values. What’s important to you may not be to someone else.


Just think about what is really important to you. Your family? Your goal may be paying for your kids’ college. Your home? Your goal may be renovating your current home. Your career? Your goal may be going back to school yourself. Your retirement? Your goal may be to max out your retirement plan funding.


There really isn’t any right or wrong answer here. We would suggest listing all the financial goals you currently have (don’t start saving for your kids’ college before you have one!). Once you have all your current goals written, select the 2-3 most important ones. Those are the ones you should concentrate on first. Also, be sure you know why it’s important to you that you achieve a goal. If you ask yourself that question and can’t come up with a clear answer, maybe it shouldn’t be on the list.


There may be some situations where you want to concentrate on one goal before the others. You have debt you want to pay down to free up cash flow, and then you plan on using that extra cash on another goal. Work it out however you feel comfortable with; just don’t sacrifice something that needs to be funded (like retirement).


When you prioritize your goals, it shouldn’t necessarily be by the date you want it completed by. People often want to save for their kids’ education and their own retirement, so they will focus on college funding because it will come to pass first, when in reality the more important of the two goals is retirement. Between a choice of having your kids’ college paid for or having to have their support for 30-40 years in your retirement, which one would you choose (and which would your kids prefer)?



Having “financial independence” in retirement is a goal we often see people set. This usually means not having to rely on any one but yourself for your financial needs, typically with no debt and enough savings/investments to take care of all your needs. It’s a great goal to have, probably one that many people should have, and it’s never to soon to start on it.


If you’re 22, just out of college, with nothing to your name, you probably have big goals in mind, which is great! But don’t forget about the future, even if retirement seems so far away. Start funding a retirement account right away, as much as you can, and it will make a huge impact on your financial situation down the road.


Moving Forward

Once you decide what your most important goals are, you have to decide what to do about them. It probably won’t be easy, and may require cutting back elsewhere. If you’re saving for something, you’ll need to decide how much it’s likely to cost and when you want it to happen by, and save accordingly. That may seem simplistic, but once you have decided exactly what you want and even have it written down somewhere, it’ll be much easier to move forward.