Become a Better Money Manager

From my point of view -- or as they say, IMHO -- none of the above "reasons" -- I'd like to call them "excuses" -- are valid for not having retirement savings. All of them can be overcome by following basic financial principles. The following are time-tested principles, which have been repeated over and over again. What most people lack is the willingness to actually do them, rather than just think about them. 

1. Set SMART financial goals

The first step toward achieving your financial goals is to set parameters against which you can measure your progress. That means ensuring your goals are Specific, Measurable, Achievable, Relevant and Time-bound, or SMART.

Using the SMART approach will force you to be more precise about what you want to achieve and give you less room to make excuses should you fall short. Here’s an example to get you started:

Vague goal: Contribute to my 401(k) each month.

SMART goal: Contribute 5% of my salary to my 401(k) each month in order to receive my employer’s full matching contribution.

• The goal is specific: If you don’t already know your employer’s matching percentage, ask your Human Resources department.
• The goal is measurable: You can easily see whether you’re having enough deducted from your paycheck each month to get the match.
• The goal is likely achievable, since it’s a small percentage of your pay and can be automatically withheld.
• The goal is relevant, as retirement savings is among the most important financial issues anyone will face.
• The goal is time-bound because you’ve committed to contributing a specific amount each month.

Be sure to take the time to actually write down your SMART goals, which will form the basis of your financial plan. Research has shown that creating a written financial plan is more effective than simply thinking or talking about your goals. Indeed, more than two-thirds of people who have a written financial plan say they feel financially stable, whereas just 28% of those without a plan feel the same way, according to recent surveys.

2. Turn your goals into an action plan

With your SMART goals firmly established, now it’s time to look at your goals individually, ranking them in order of priority and assigning a price tag to each. This helps you see how much money you’ll need each month to achieve all your goals.

If, once you’ve tallied up your goals, any of them seem unattainable, take a step back and reassess. For example, maybe you should consider a less-expensive house or giving yourself more time to save for the down payment. Perhaps you should investigate other ways to help fund your child’s education, such as grants, loans, and scholarships. Or maybe you need to take a closer look at how to reduce your monthly expenses.

The key here is to have manageable goals that you can stick to. Even if they seem more modest than you might want, trust that having goals—and a written financial plan—will help you make more progress than you would otherwise.

Be sure to root your plan in realistic assumptions, as well. For example, how much can you expect to earn on your retirement portfolio each year? How much will a four-year college education cost, on average, by the time your child is ready to enroll? Historical rates are a good starting point for such projections, as are retirement and college savings calculators. In the case of stock market returns, however, past performance may not be indicative of what you can expect in the future.

It can also be useful to look at different scenarios when making your projections. If you can reach your retirement goal with your current contributions and a 7% annual return on your investment portfolio, for example, it might be good to look at how a 6% return would affect your situation. If even a slightly smaller annual return would leave you far short of your goal, you may want to consider upping your savings target to account for that possibility.

3. Make regular commitments to stay on top of your finances

Organizing your financial goals and clarifying your financial plan isn’t going to help you keep your New Year’s resolution unless you stick to your plan over time. One good way to do that is to create a detailed quarterly schedule of money-related tasks. Here are some of the things you might put on the checklist for each month or, at least, each quarter: Portfolio review, taxes, health care, credit reports, etc. 

For more information on financial planning, see Does Financial Planning Help?