Financial Makeover

Financial goal setting, like many other goals in life, is more successful if you have a plan. There is a difference between a goal and a desire. Financial goal setting is important because many people have wants and desires, but never really follow through with them because they don’t develop a concrete goal to follow. Also if you create financial goals, you are more likely to be financially successful.

A goal is something that is specific and has an agenda to reach the goal. In other words it has to be concrete with a plan. For example, I will save $5,000 in one year. By starting the goal with “I WILL”, gives it meaning. You are making a statement saying that this is something that must be accomplished. A desire, on the other hand, is a lot less meaningful. Let’s use the example, “I want to save money”. I WANT is a statement of desire, which is not a concrete plan and therefore can be equated to a dream. I WANT, is saying simply that it is something that you desire to do or achieve, but without any direction. The biggest difference between the two statements mentioned in this article is the power that they hold. Saying I WILL is a lot more POWERFUL than saying I WANT. Also notice that the I WANT statement has no way of creating a plan.

The goal of saving $5,000 in one year can be broken down into smaller, manageable parts which gives you the ability to make checkpoints on the way to reaching a big goal. Statistics show that when striving to reach a goal, short term goals are easier to achieve because the time it takes to achieve your goal is short. By reaching the short term goal, you feel good about your success. Since, $5,000 in one year is a medium term goal, it will be more effective to break it down into short term goals. So if we divided $5,000 by 12, we can make a new statement. I WILL save $416.67 per month. That goal now is smaller and less overwhelming. Further still we can break that down to weekly goals. Simply divide $416.67 by 4 weeks, to get $104.17 per week. Which is quite an easy goal to reach. In fact, let’s say that you have a job making minimum wage, depending on the state you live in. Estimating an average of about $10 per hour being that the U.S. Federal minimum wage is $7.25, and some states have as high as $14.00 per hour (California) with most states having wages higher than the Federal minimum wage(1). $104.17 is about 10 hours of work, which is a little more than one day’s work in a week. Of course to account for taxes, it is safe to say that anyone who works at least 2 days in one week can accomplish the goal of saving $5,000 in one year.

One of the first things everyone should learn to do is to “Pay Yourself First.” This advice was once given to me when I first started teaching math by one of my colleagues. What I did not understand was what exactly this meant. “Paying Yourself First” means that you should always put money into your savings account or retirement account prior to paying your expenses. So a correct budget would allot for savings as if it were a monthly bill. For example, let’s say you want to set up an emergency fund, which is 6 to 12 months worth of living expenses. It is easier when you are younger to accomplish this goal because you don’t have as many financial responsibilities. Depending on which state you live in, the cost of living is variable. To get started and estimate how much money you should have in the emergency fund, I used New Jersey as an example because it is one of the most expensive states to live in in the United States according to a recent study by the Bureau of Labor Statistics(2).

Let’s estimate that the cost of housing in New Jersey is $1,500 to either rent or own in New Jersey based on statistics and my personal knowledge of living in New Jersey(3). A family of four spends about $400 per month on food on average(4). Utilities cost on average about $105 per month, and transportation costs vary depending on where you live(5). Let’s estimate that if you own a car and have a payment, that it will cost $400 per month including car insurance. Gasoline, repairs, tolls, would also vary, but let’s say $400 per month for far commuters. Summing up all of those basic needs, is roughly $2,800 per month. Keep in mind all of the estimates that I include here are rough estimates based on some statistics and personal knowledge of living in New Jersey and may differ from person to person, also does not take into account inflation. So living expenses in New Jersey can be estimated to be about $16,800 for 6 months and $33,600 for a year. This means that if you want to have an emergency fund of 6 to 12 months of living expenses, you need to save between those two values. Again, when you are younger and are dependent on someone else, it is a lot easier to accumulate that amount of money.

An emergency fund is used for any unanticipated bills, emergencies, or loss of income. In other words, if you lose your job, your car breaks down, you get a speeding ticket, you get sick and new medical care, etc, you have the funds available to you rather than going into debt. An emergency fund, if set up properly, is available so you can borrow from yourself rather than charge money on a credit card or resort to taking out a loan. Let’s say that you have to use $2,000 to pay for damages to your car. If you borrow the $2,000 from your emergency fund, then you pay it back without interest. The best way to replenish your emergency fund is to break the $2,000 down into monthly payments for a limited amount of time. If you give yourself a year to pay it back, then you can pay $167 to your emergency fund every month for a year to get back to where you started. Good practice also is to monthly pay into your emergency fund a set amount of money for it to continue to grow over time. Once it gets set up, it is easier to keep it going, then to start it over again from scratch when you are older and have more financial responsibilities. The key to a successful emergency fund is replenishment. Also it is not meant to be for buying high ticket items such as a house or a new car.

Saving a minimum of $16,800 will take people a different amount of time to comfortably add money to their account. Estimating minimum wage at $10 per hour again, you should start by determining how much you are comfortable with saving per week to start. Again, with less financial responsibilities, this is easier because you can afford more per week. If you work 40 hours per week at $10 per hour, which grosses $400 per week, and if you can start young with $200 per week, you would save $800 per month. That would mean, to get the minimum amount of money for the emergency fund, it would take 21 months to reach your goal. In less than 2 years, you would have enough money to be comfortable and have an emergency fund to fall back on, which is not a lot of time to get set up in life.

Not everyone works 40 hours per week and makes $10 per hour so another approach would be to use the 5 year plan method. State, “In 5 years, I will save $16,800 for my emergency fund.” That would be a very manageable amount of $280 per month, or $70 per week, which is only about one day of work. To be successful you need to treat that $70 like a monthly bill that has to be paid first. With minimal effort, you can start to set yourself up to have a more successful financial life, which makes a more comfortable and less stressful life.

If you are a bit older and don’t have an emergency fund set up or have trouble with budgets, perhaps I can help. Follow my blog for more tips and information about how to create a comfortable life by handling your finances more efficiently.

Minimum Wage by State and 2021 Increases, https://www.paycor.com/resource-center/minimum-wage-by-state, accessed 2021 February 11.

Consumer Price Index, New York-New Jersey-January 2021, https://www.bls.gov/opub/btn/volume-7/consumer-spending-by-state-bls-puts-new-jersey-to-the-test.htm?view_full, accessed 2021 February 11.

Cost of Living in New Jersey, https://www.bestplaces.net/cost_of_living/state/new_jersey, accessed on 2021 February 11.

The Cost of Living in New Jersey, https://smartasset.com/mortgage/the-cost-of-living-in-new-jersey, accessed on 2021 February 11.