Now that I have written about creating your ultimate financial goal and establishing your long-term financial goals, it’s time to think about short-term and intermediate-term goals. I’ll also use the terms open-ended, close-ended, and overlapping funds.
Our Financial Plan
If I were to go back in time, say four years ago, and map out my financial plan, here’s what it might look like -
- Establish $2000 mini-emergency fund
- Eliminate all debt
- Contribute enough to 403(b) retirement to receive match
- Purchase adequate insurance (health, life, disability, property, automobile, etc.)
- Establish fully-funded emergency fund
- Increase contributions to 403(b) retirement account
- Establish Roth IRAs for my wife and for me
- Establish Education Savings Accounts for our children
Years 3 – 10
- Fully-fund retirement accounts
- Fully-fund education savings accounts
- Increase savings for automobile replacement
- Increase savings for future home purchase
As you can see, these are pretty concrete, easy-to-understand goals, especially the goals for year 1 and year 2. The real fun begins at year 3, or after you have paid off your debts and established an emergency fund. (By the way, I have yet to find a financial expert who didn’t recommend paying off consumer debt and establishing an emergency fund. For our family, these were our first absolute-must goals.)
Close-Ended Goals -
Close-ended goals are time-based. Establish the goal, establish an end-date for that goal, accomplish that goal, and then leave that goal behind. Examples include paying off consumer debt, or paying for kids to go to college. Close-ended goals can be long-term, intermediate-term, or short-term.
Open-Ended Goals -
Open-ended goals are goals which have no set end-date and are ongoing, lifestyle-related goals. Examples include living debt-free or being a financial blessing to others. Once again, these goals can be long-term, intermediate-term, or short-term.
Overlapping Funds -
Overlapping funds are funds which can be used for two or more goals. An example would be, money in a savings account which could be used to pay for a newer automobile or used to purchase a new home. As we prioritize our savings and move forward, our ultimate plan is to eliminate the need for overlapping funds. We want enough money in our savings account to pay for a newer automobile and to purchase a new home.
Putting It All Together -
First, I create short-term, close-ended goals, like paying off my debts and establishing a fully-funded emergency fund.
Second, I create intermediate-term, close-ended goals, like fully-funding retirement accounts and fully-funding education savings accounts. (Note – While saving for retirement will be ongoing, year after year, the time period for fully-funding each account is very specific, thus creating a close-ended goal. This close-ended goal is established each year.)
Third, I create intermediate-term, open-ended goals, like increasing non-retirement savings and increasing charitable giving. (Note – I could make these close-ended goals, if I liked, but I prefer to keep these goals open-ended, funding them with money left over after retirement and education savings contributions.)
Fourth, I acknowledge that certain funds, inside certain accounts, could be used for multiple purposes. For instance, money in my savings account, which is earmarked for a newer automobile, could be used, in a pinch, to pay for college. Money in a retirement account, while earmarked specifically for retirement, could be used to help out in the event of a catastrophic emergency. My plan, however, is to fully-fund each of my goals, so as to eliminate any of this overlap.
Fifth, as I eliminate the need for overlapping funds, and each dollar is associated with a specific goal, the purpose of each goal is combined to help me achieve my long-term goals.
Possible Scenario -
I’ll use myself as an example, to see how this might all work out in the real world.
Short-term, close-ended goals -
Eliminate consumer debt and establish fully-funded emergency fund. (Done)
Intermediate-term, close-ended goals -
Fully-fund retirement and education savings accounts. (Done)
Intermediate-term, open-ended goals -
Increase non-retirement savings (for future home purchase and auto replacement). (Ongoing)
Eliminate Need Of Overlapping Funds
This one is tricky. Right now, I have enough in my savings to survive for one year, should my wife or I lose our jobs. I also have enough, in savings, to be able to purchase a newer car, should the need arise. I do not, however, have enough to also cover the down-payment on (or purchase of) a new home. I can do one – buy a newer car -or the other – make a down-payment on a new home, but I cannot do both. My plan, in the long-term, is to completely eliminate this overlap, so that I never have to think – “I could get the money from here, if I had to…” Does this make sense? I want enough money to cover the expenses associated with each goal.
Understand The Relationship Between Goals
Each year, one of my intermediate-term, close-ended goals is to fully-fund my 403(b) retirement account. Even though this goal is close-ended for each year, the effect of accomplishing this goal, year after year, is long-term and open-ended. In other words, every year, I have a goal of fully-funding my 403(b). This is a goal, in and of itself. However, doing this year after year, in reality, is helping to meet a long-term goal – retiring with enough money to purchase a nice home and live financially independent.
The truth is, none of our goals, whether short-term or long-term, close-ended or open-ended, exist in a vacuum. Each goal affects the other goals. That’s why it is so important to focus on on overlapping funds. You can have all of the goals that you want, but if you do not have enough money, in the right accounts, earmarked for specific goals, your goals will prove meaningless. I like to think of it as budgeting for the future.
I want to thank those of you who entered for a chance to win a free debt reduction book. Winners have been chosen and I’ll announce them over the course of the next few days. I apologize for the delay in posting, but I have been under-the-weather. I feel much better now, and I would like to thank those who emailed or tweeted to ask how I was doing.
Side note: I’ve mentioned it several times before, but just to clarify for new readers. I live in a home provided by my employer, as part of my compensation. One of my goals is to someday pay cash for my own home. Should the time come and I need to purchase a home before I can pay for it with cash, my goal would be to have enough in savings to make a 20% down payment.
One last thing about overlapping funds - When you get started, every dollar that you have will be overlapping. This cannot be avoided. For instance, say you have $10,000 in your savings account, with $5000 earmarked for emergencies, $1000 for automobile replacement, and $4000 for future home purchase. You are driving down the street, your engine dies, and you need a newer car. More than likely, you’ll try to find a car for less than $6000, the amount in your emergency fund plus the amount earmarked for automobile replacement. What happens, the next day, when your refrigerator dies? You “have” the money, but it’s not specifically earmarked appliance replacement. Of course, you are not going to worry about whether the money was originally intended for appliance replacement, you are simply going to purchase a replacement refrigerator. The money, in reality, was overlapping – it served more than one purpose. Our goal, our plan, is to eliminate this scenario. Over time, we want to have enough in our emergency fund, enough in our automobile replacement fund, enough in our new home purchase fund, and enough in our appliance replacement fund, to cover the expenses associated with each type of need. Noting, obviously, that until we get to this place, having money in our account, even overlapping money, is much better than having no money in the account at all!
Final Note – By definition, the emergency fund is for unplanned-for expenses, and thus the money in the emergency fund is overlapping. Problems arrive when we use money in the emergency fund for non-emergencies. Personally, our emergency fund is only to be used in the event that my wife or I were to lose our job. All other purchases and savings needs are included in our monthly budget.