Don’t become a wandering generality. Be a meaningful specific — Zig Ziglar
It’s Phase 3 of your personal financial plan, where you finally realize there is a purpose to all this hard work. Paying off debt feels good, but it’s not something you want to do your whole life.
Your first step in this phase is to set aside enough cash so you never have to go into debt again. Your second step is to lay the groundwork for what will be the final stages of your financial plan.
Build An Adequate Emergency Fund
In Phase 1 of your personal financial plan, you built up a small emergency fund for insurance on unplanned expenses. Therefore, you wouldn’t have to dig yourself deeper in debt if you had a few hundred dollars in extra expenses one month.
Unfortunately, $1,000 or even $2,000 isn’t large enough for protection agaisnt all unplanned expenses. You’re going to need an emergency fund that will protect you agaisnt larger expenses like e.g., job loss, medical, auto…etc
There is no exact formula on how much money to set aside. However, at a minimum, you should have at least 3 months worth of living expenses.
The amount you set aside should increase based on your monthly commitments and job security. E.G., if you have a mortgage, kids, outstanding debt, and a risky job, you should increase your emergency fund.
Setting Financial Goals
Since you paid off your debt or at least your high interest debt in Phase 2, you can now begin to brainstorm better uses for your money. From experience, it feels great to spend money on something important and not interest on outstanding debt.
As a young adult, here are a few examples of goals that you can save for.
- College/Grad School/Children’s Education
- Debt – Low interest debt that you didn’t get rid of in Phase 2
- Home – Down Payment/Pre-Payment/Maintenece/Renovations
- Retirement – Early Retirement/Sabbalicals
- Wedding – Engagement Ring/Reception/A Whole Lot More!!!
- Gifts – Christmas Gifts/Wedding Gifts
The best way to save for any goals that I have found is to act SMART.
- Specific – Set your financial goals as specific as possible, e.g., Save $2,000 for a two-week long backpacking trip in 10 months
- Measurable – How much do you need to save each month, week, or day? Since I have a monthly review, I prefer to know how much I need to save each month. For example, set aside $200 a month into a savings accounts designated for my trip.
- Attainable – Each goal set should make you think of new and creative ways to make your goal. However, your goals should still be realistic.
- Relevant – If you set a goal six months away, that goal must become even more important to you in six months, than it is today.
- Timely – A financial goal should always have a beginning or an end. If you don’t set an end, you’re never going to get to the end.
The actual saving for these goals will take place in another phase of your personal financial plan. The purpose of setting goals in Phase 3 is for you to realize that there is more to financial planning than paying off debt and minimizing expenses.
Moving Forward In Your Personal Financial Plan
On Friday, I will post Phase 4 of your personal financial plan.
In the comments, I would like to hear of any other financial goals that you’re working towards.