When you first start saving it seems to take FOREVER to build up any sort of balance. I remember when I first started contributing to my 401k and building a regular savings account – fifty to one hundred dollars at a time – my annual statements barely increased. It was slow progress, sometimes discouraging but I kept trucking and eventually saw the money grow.
Of course, I had a few blips along the way like stopping my 401k contributions in my late 20s (one of my biggest regrets and although I try to look forward I kick myself constantly for this one), reducing savings to allow for more spending, etc. But, after a few years (or a couple of decades) my husband and I manage to save more than 50% of our income, working aggressively toward our financial and early retirement goals.
To achieve financial independence we need to make financial progress every year and increasing our net worth by $100k per year is a steep, round number that will help us achieve financial independence more quickly. The thought of saving such a large amount can be daunting, but if you break it down into smaller, monthly savings goal, it’s a little more palatable. I urge everyone to dream big, but then create a path or plan to help you achieve that goal. Whether your financial goal is to save $1 Million, $100 or somewhere in between, you can get there with a plan. And, even if you don’t achieve your goal in full, you will have made progress! Even a little bit of progress can help keep you motivated and fuel your mission.
First, I’m going to convert our annual goal into a monthly goal. So, now I’m looking at increasing our net worth by $8,333 per month. Still a big number, but a little easier to work with. Let’s break down what it would take to achieve that financial goal:
- $1500 ($3,000 for a couple) – Maximize 401k contributions (or in our case TSP, the federal government’s equivalent to a 401k). The annual contribution limit is $18,000 per year (or $1500 per month). Most people will also get an employer match, which I’ll include a bit later. In our case, I get a 5% match and my husband doesn’t get a match (he’ll be eligible for a pension instead).
- $458.33 ($916.66 for a couple) – Maximize Roth IRA contributions; limit is $5500/year for each.
- $1300 – Reduce our mortgage debt by $1300 (we carry three mortgages for our investment properties and $1300 is the amount of debt paid against the principle each month, whereas our monthly mortgage payment is $3400). Although reducing our mortgage won’t increase our savings, it will reduce our debt which also increases our net worth.
Let’s do a quick tally: our retirement savings and monthly principle mortgage deduction = $5216.66. Woot! Only $3116.34 to save. AND, if this was the extent of our savings, we’d be increasing our net worth by $62,600 – which is awesome! And, don’t get discouraged if you aren’t saving this much. You have to start somewhere and then figure out how to increase your savings. I read blogs where 23-year-olds are maxing out there retirement contributions – we weren’t able to do this until we hit 40. And, I’ve read forums where 50 or 60-year-olds are just starting to save for retirement, it’s never too late to start!!
Next, what other savings do we have? We have been focusing on increasing our earnings and savings for several years now, so we have additional monthly savings to add:
- $1000/month in a traditional savings account (.95% interest rate); this goes toward our emergency fund and house maintenance fund.
- $1000/month in a non-retirement investment account (Vanguard index fund); we opened an investment account almost two years ago so we could invest in the stock market outside of our retirement savings.
- $253/month employer match for my 401k (TSP) – this isn’t money we have to save, but it’s money my employer gives me to match a portion of my TSP contribution. This also helps us chip away at our savings goals.
I needed an additional $3116.34 in savings per month, so now we have $3116.34 – $2253 (1000+1000+253) = $864.34/month, the amount still needed to meet my goal. I’m hoping a portion of that gap will be closed by interest earned, but the stock market could be up or down, so not a guarantee. Also, if the stock market tanks, our investments will, too, in which case I won’t meet the goal this year. But, we’ll continue to invest and hope that it will pay off in dividends when the market recovers. For now, I’m going to focus on what I can control.
It won’t be easy to find an additional $864/month, but it’s doable. We could try and decrease our spending (we are pretty frugal, but could probably find at least $50-100). One of my other goals is to get a new job and increase my income, but I don’t plan on tackling that goal until later this year. My husband is also expecting a promotion, but not until 2018 so that won’t help now. So, my immediate goals are to try and find some additional monthly savings and to try and earn some money from this blog. Both are a stretch, but I’ll try and keep you posted on progress later this year.
Not only do you need to figure out how to finance your goals, but then you should also have an idea as to how you will spend the money to achieve your goal. What will we do with the extra $800? We plan to increase our principle payment on one of properties ($100-200), increase our traditional savings ($500) and potentially invest the rest in our Vanguard non-retirement investment account. This isn’t set in stone, but it helps us align our finances with our goals and not stray or spend foolishly. And, in the event we get unexpected income (bonus, raise, tax return, birthday money), we know how to best allocate the funds.
Additionally, I want to make sure that my short, mid, and long-term goals support each other. In terms of net worth, I have other goals such as starting at least one side hustle, running a successful blog, finding a new job and increasing my income, all of will help me increase our net worth and make progress toward financial independence. Although I do have goals that will cost us money (i.e. starting a family and traveling), they don’t compete with my financial goals. The financial goals will help us achieve starting a family (paying for fertility treatments or adoption), travel, and more. You want to make sure you prioritize your goals and do your best to make them complementary.
Lastly, automate your savings as much as possible. Our retirement savings are automated (our TSP contributions are deducted directly from our paycheck so we don’t even see that money) and our monthly Roth IRA contributions are automatically deducted mid-month. Likewise, our mortgage payments and monthly savings are automatically transferred at the beginning of the month.
It’s only January, so I’m excited to track progress as the year goes by and I plan to provide updates along the way. In the meantime, let me know what your financial goals are and if tracking your net worth is one of them. Do you feel like you can achieve your financial goals? What savings tools and techniques do you use?
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