Tuesday, October 30, 2012

My Changing Goals

There have been some interesting conversations within our household the last week or so that generated some intriguing insights that I’d like to share with you today. Up until now for just about the past 4 years my wife and I have been following Dave Ramsey’s baby steps just about to a tee. We established our baby emergency fund and then proceeded to pay off all debt, $80,000 in all and in doing so we have happily become a debt free couple. From there we raised our emergency fund to 6 months worth of expenses, began to save for a house, set aside 15% of our gross income towards retirement, began to invest in a taxable brokerage account and started saving for what will be contributions to our future kids’ Educational Savings Accounts.

Where the rubber meets the road is in the long term approach of our game plan. When we were early on in our baby steps we had definitive goals that had end dates that ranged from a matter of months to a matter of years. Being on the latter side of the baby steps is a marathon and not a sprint. The saving and investing that we do now is for long term wealth building. Unlike when we were working our debt snowball, the 15% we set aside for retirement, at the earliest through our ROTH IRA, has a “do not use” date attached to it for when we turn 59 ½.

“But what about living on investment income BEFORE we get old?” This has been my wife’s chief concern that she brought to the table at our most recent household budget committee meeting. And she has a valid point. It would be wonderful to live off investment income well before we become eligible to do so through our Roth IRAs. But to do that we have to prioritize it.

Since we became debt free I feel like we’ve been trying to do too much and are not utilizing the power of focused intensity. Between the two of us our top laundry list of things that we want to prioritize include: paying cash for our first home, saving for retirement, regularly saving for vacations, planning a big vacation trip in 2013, investing outside of retirement vehicles and moving to a new apartment.

I definitely agree with you if you feel that is a long laundry list. So we’ve decided, after much debate and negotiations to focus on a few goals at a time. Under 2 umbrellas, for the next 2 years we will be focusing on savings goals (our first home and increasing investments in our taxable brokerage account) and travel goals (moving, vacations). While scary to me (fitting with Halloween being tomorrow) you notice that retirement saving is not on the aforementioned priority list. As my wife happily pointed out to me, currently we have $40,000 set aside in retirement between our 401ks and Roth IRAs. If we do not invest another penny and assuming 12% average annualized returns, at 59 ½ this will grow to over $1.8 million dollars. Now of course as we move through these new “shorter” term goals eventually we will get back to regularly contributing to retirement and saving for our future kids’ college.

But like the debt snowball, there are greater forces at work here. Our plan is essentially two-fold. By lumping together moving expenses, regular vacations and a big ticket vacation in 2013, we established a total number that we need to hit by about mid-year next year. So we have changed our budget to take a sinking fund approach to fund these endeavors and put these travel goals on auto-pilot. With everything else that we can squeeze out of the budget we are saving for our future house and increasing contributions to our taxable brokerage account. By the end of 2014 we plan to have more than enough funds to buy a home and be on our way through the brokerage account to live off its investment income by the time we are 50. For 2 years we will pause retirement investing to hit these goals.

I’m excited, nervous and definitely out of my comfort zone. But I’m looking forward to sharing our progress with all of you as I continue my march from 0 to one million.

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