Money doesnât make you happy. Thatâs how the saying goes, and you canât deny that thereâs some truth to it. However, while having lots of money wonât make you happy, having very little is more likely to make you stressed and depressed. The less you have, the more likely you are to stress over the […]
The Shame of Debt is a post from Pocket Your Dollars.
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A key financial decision people struggle to make is how to allocate savings for multiple financial goals. Do you save for several goals at the same time or fund them one-by-one in a series of steps? Basically, there are two ways to approach financial goal-setting:
Concurrently: Saving for two or more financial goals at the same time.
Sequentially: Saving for one financial goal at a time in a series of steps.
Each method has its pros and cons. Here’s how to decide which method is best for you.
You can focus intensely on one goal at a time and feel a sense of completion when each goal is achieved. It’s also simpler to set up and manage single-goal savings than plans for multiple goals. You only need to set up and manage one account.
Compound interest is not retroactive. If it takes up to a decade to get around to long-term savings goals (e.g., funding a retirement savings plan), that’s time that interest is not earned.
Compound interest is not delayed on savings for goals that come later in life. The earlier money is set aside, the longer it can grow. Based on the Rule of 72, you can double a sum of money in nine years with an 8 percent average return. The earliest years of savings toward long-term goals are the most powerful ones.
Funding multiple financial goals is more complex than single-tasking. Income needs to be earmarked separately for each goal and often placed in different accounts. In addition, it will probably take longer to complete any one goal because savings is being placed in multiple locations.
Working with Wise Bread to recruit respondents, I conducted a study of financial goal-setting decisions with four colleagues that was recently published in the Journal of Personal Finance. The target audience was young adults with 69 percent of the sample under age 45. Four key financial decisions were explored: financial goals, homeownership, retirement planning, and student loans.
Results indicated that many respondents were sequencing financial priorities, instead of funding them simultaneously, and delaying homeownership and retirement savings. Three-word phrases like “once I have…,", “after I [action],” and “as soon as…,” were noted frequently, indicating a hesitancy to fund certain financial goals until achieving others.
The top three financial goals reported by 1,538 respondents were saving for something, buying something, and reducing debt. About a third (32 percent) of the sample had outstanding student loan balances at the time of data collection and student loan debt had a major impact on respondents’ financial decisions. About three-quarters of the sample said loan debt affected both housing choices and retirement savings.
Based on the findings from the study mentioned above, here are five ways to make better financial decisions.
Rethink the practice of completing financial goals one at a time. Concurrent goal-setting will maximize the awesome power of compound interest and prevent the frequently-reported survey result of having the completion date for one goal determine the start date to save for others.
Do more of anything positive that you’re already doing to better your personal finances. For example, if you’re saving 3 percent of your income in a SEP-IRA (if self-employed) or 401(k) or 403(b) employer retirement savings plan, decide to increase savings to 4 percent or 5 percent.
Decide to stop (or at least reduce) costly actions that are counterproductive to building financial security. Everyone has their own culprits. Key criteria for consideration are potential cost savings, health impacts, and personal enjoyment.
Almost 40 percent of the respondents were saving nothing for retirement, which is sobering. The actions that people take (or do not take) today affect their future selves. Any savings is better than no savings and even modest amounts like $100 a month add up over time.
Use an online calculator to set financial goals and make plans to achieve them. Planning increases people’s sense of control over their finances and motivation to save. Useful tools are available from FINRA and Practical Money Skills.
What’s the best way to save money for financial goals? It depends. In the end, the most important thing is that you’re taking positive action. Weigh the pros and cons of concurrent and sequential goal-setting strategies and personal preferences, and follow a regular savings strategy that works for you. Every small step matters!
This page may include affiliate links. Please see the disclosure page for more information. Let’s face it, debt in the United States is a problem. From our national debt, student loan debt, and consumer debt. Debt in the United States is a problem on all levels. Why is that? I’m a firm believer that it starts with…
The post Debt In The United States appeared first on Debt Discipline.
In July of 2013, I finished paying off my student loans. It was a fantastic feeling and something I still think about to this day. Even though I have a success story when it comes to paying off student loans, I know that many others struggle with their student loan debt every single day. The […]
The post How Blogging Paid Off My Student Loans appeared first on Making Sense Of Cents.
Continue ReadingAs of February 2020, student loan debt in the United States reached a record total of $1.6 trillion. Many people are struggling to pay student loans and taking part in various deferment and other assistance programs. As COVID-19 and related shutdowns caused economic issues across the nation, the federal government passed the CARES Act, which… Read More
The post Stimulus Acts and Student Loans: What You Need to Know about CARES, HEROES, and HEALS appeared first on Credit.com.
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