Now that tax season is over, it is a great time to shift focus and think about setting personal financial goals. This still applies even if you are on an extension for your tax deadline—after all, do not let the urgent overshadow the important.
We have written a lot about goals in this space, so this is not exactly groundbreaking, but here are some thoughts about how to strategize when it comes to personal financial goals.
As with all types of goals, be sure you set SMART goals: specific, measurable, achievable, relevant, and time-based. Generic, unmeasurable goals typically fail. If your goal is to “be rich” or even “be able to retire early,” you may never obtain it. What does that even mean? How will you know when you accomplish it? Is it realistic? Does it truly matter to you (in other words, what is your “why”)? What is your time frame? Instead, if your goal is to “save 20% of my gross salary in my Roth 401(k) within four years by increasing my savings percentage 5% each year,” you are already well on your way to success!
Many folks in the financial independence retire early (FIRE) movement already know they want to retire early—or at least have that option as soon as possible—and have already calculated their FI number, i.e., the amount they need to have saved in order to live off the income from their nest egg in perpetuity. That is the Big Goal. But to get there, you need to accomplish a bunch of little goals along the way.
If you are not sure where to start with your personal financial goals, a great place to begin is the FI order of operations. After becoming debt-free and building your emergency fund, the next several steps focus on maximizing your contributions to various tax-advantaged retirement and health savings accounts. Follow them in order to make your dollars work for you in the most efficient way possible.
Another approach is focusing your financial goals on improving your financial habits to make sure your spending increases happiness. This can mean creating a high-yield savings account to provide yourself a travel budget, saving for a down payment on a home, or buying your favorite coffee each week. Small financial goals are important and inspirational too.
But big goals are likely more difficult to choose and maintain over time. Below are two sample goals from the FI order of operations that you might consider to improve your entire financial wellbeing, regardless of your specific financial position.
Contribute enough to your 401(k) plan to maximize your employer matching contribution.
Standing alone, contributing enough to your 401(k) plan to maximize your employer matching contribution is not a SMART goal, but we can make it into one.
Specific: While this goal seems specific enough, it is still lacking. After all, are your contributions going to be traditional, Roth, or some combination of the two? All else being equal, I tend to favor the Roth path because it gives you more options in the future. Also, your employer contributions will likely be traditional, so you still get a good mix.
A caveat here: Some employers require you to specify a dollar amount on your payroll contribution form rather than a percentage, even if the 401(k) plan itself references a percentage. Be sure you are filling out the form correctly.
Another caveat: You do not have to contribute ratably throughout the year. For instance, you could make your entire 401(k) contributions for the year from your first four paychecks. But most employers calculate the matching contributions on a per-paycheck basis, so if you front-load or back-load your contributions you might end up leaving money on the table. Your best bet is to contribute ratably throughout the year. Besides, this way you also take advantage of dollar-cost averaging with your investments.
Measurable: Look at your employer 401(k) plan documents. For instance, if your plan says the employer will match “100% of the first 4% of employee contributions, and 50% of the next 4% of employee contributions,” you need to contribute 8% of your gross salary to get the maximum 6% total employer matching contribution. (In this scenario, if you contribute less than 8%, you are literally declining free money.) Contributing 8% of your gross salary to your 401(k) plan is both specific and measurable.
Achievable: Whether this is achievable immediately depends on your personal circumstances. You might not be able to contribute 8% right away based on your gross salary and your personal budget. If that is the case, contribute at least 4% right away since that gets you a 100% employer match, and then do the next 4% (where you only get a 50% employer match) over the next year, by adding 1% every three months. You can make periodic incremental adjustments without disrupting your lifestyle.
Relevant: The “why” here goes beyond simply getting free money from your employer. You want that free money because it is one step towards the financial freedom that allows you to live life on your own terms. Keeping the “why” at the forefront of your mind allows you to more easily take the action steps necessary to achieving your goal. Here, those action steps might include cutting certain expenses from your monthly budget, and would certainly include filling out specific forms for your employer by a particular date.
Time-based: Give yourself a deadline. If you can contribute the full 8% now, fill out the form today. If you need to gradually build up to that 8%, figure out what you can do today and how and when you can ramp up to that 8%. You can even take this further and decide you will contribute 1% more each year going forward!
Sample SMART goal: “Contribute 8% of my gross salary to my Roth 401(k) each pay period. Submit the form to payroll by 4 p.m. today.”
Maximize your Roth IRA contributions.
Is maximizing your Roth IRA contributions a SMART goal? Again, no—there are too many outstanding variables—but we can quickly transform it.
Specific: This goal seems specific at first glance because you have already decided that your contributions will be Roth. But we need to dive a little deeper because IRA contributions can be made at any time, and in any amount, throughout the year. (You even have until April 15, 2025, to make contributions towards your 2024 limit. If you make any IRA contributions between April 1 and April 15, you need to specify whether they are current-year or prior-year contributions.) To be specific, you must determine the timing and amount of your IRA contributions. Some folks prefer to contribute the maximum amount at the beginning of the year so they can check it off their list. Others prefer to accumulate the funds throughout the year and then contribute all at once towards the end. Another approach is to divide your annual contribution total by twelve months or the number of paychecks received.
Most brokerages have a “maximize” setting for automatic monthly contributions, which is my preferred method. This way, you contribute the same amount at the same time of the month with no effort on your part. Your monthly contribution automatically increases each January based on updated annual maximums.
Depending on your income level, you might need to contribute via a backdoor Roth.
Measurable: This goal is measurable because the Roth IRA contribution limit is set by law for each year. In 2024, for instance, the Roth IRA contribution maximum is $7,000 (not including any catch-up contributions.) At the end of the year, it is easy to see whether you have met this goal by simply adding up all your contributions.
Achievable: Whether your personal budget allows for a $7,000 contribution (or $8,000 including the catch-up contribution if you are eligible) is an individual question. If you cannot contribute the full amount this year, figure out how much you can contribute in 2024, and then contribute the maximum in 2025.
Relevant: Maximizing the tax efficiency of your retirement savings, and thus accumulating more long-term savings using the same amount of dollars, is just a means to an end. Even retiring early is a means to an end. What is your “why”?
Time-based: Include a time horizon rather than just waiting until December. There are eight months left in the year. If you have not contributed to your IRA yet, an $875 monthly contribution from May through December will get you to the $7,000 maximum.
Sample SMART goal: “Make automatic backdoor Roth IRA contributions from my checking account to Fidelity of $875 each month starting May 10.”
Call in a pro.
“All else being equal” is an assumption the size of Alaska. No two paths are alike, and it often helps to have a neutral professional help you set goals and chart a path forward.
Plus, these are only two examples of myriad potential goals. They are also relatively common goals that you can likely navigate on your own. However, your personal finance goals can go beyond the FI order operations and target a wide range of financial priorities in your life. Wherever you are on your financial journey and whatever financial goals you are prioritizing right now, I can help you figure out your next steps. Contact me today to set some financial goals pertinent to your life!
** As a fee-only fiduciary advisor, I work on an hourly rate only; I get no commissions based on investments I recommend or the size of your portfolio. All that matters is that you achieve your goals. My approach is to help folks set up their finances and manage it themselves. You are always in the driver’s seat—I am not one of those advisors that you need to call to place an order. I hand you a flashlight to illuminate the way rather than leading you blindfolded.
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