Challenge Your Goals

Talking Money: Everything You Need to Know about Your Finances and Your Future
by Jean Chatzky

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Once you've set your goals and listed them, it's time to make sure you believe in them. Write a first draft. Put it away for a week or two and then revisit it. Have any of your goals changed? Have some Talking Goals begun to seem more or less important than they did when you first put pen to paper? The items that stick after two weeks are the ones you should work toward. If you're a couple, you'll each want to make separate wish lists, edit them, and only then merge them.

Things to avoid as you go through this process: "Brussels sprouts goals," items that end up on your list because you believe you should want them, whether or not you really do.

Take college saving, for example. It's likely to show up on many lists. But do you really want to put enough money aside to pay 100 percent of your child's expenses? Is that the best thing for you considering how many years you have until retirement? Is paying for college in full the best way to encourage your eighteen-year-old to stand on her own financial feet? Maybe. Maybe not.

Or take your retirement projections. Does your life revolve around your work? Is your work the impetus for your social life or the source of most of your friends as well as your financial support? Are you the sort of person who says (and truly means): "I love what I do"? If so, then quitting work cold turkey the day you turn sixty-five is highly unlikely. The numbers you plug into whatever retirement calculator you're using should reflect that.

Frame Your Goals

Now that you have a working list, you need two other pieces of in-formation to make your goals real. The first is some idea of timing. When do you want to make these things happen? You also need to figure out what they'll cost. You'll be guessing a bit (particularly on things like how much it'll cost to rent that villa in Tuscany in the year 2007 for your twentieth anniversary). But that's okay. Getting close means you'll only have to put a small amount on your credit card or that you'll have a slight surplus. Either way, you'll be better off than if you hadn't saved at all. What you'll have sitting in front of you at that point is a big number: $3,000 for the vacation, $22,000 for one year at private college, $25,000 for the down payment on your first house. Now you have to figure out how much you'll have to put away each month-or each pay period-in order to get there. There are plenty of calculators on the Internet to help you. But you can also get extremely close with pencil, paper, and a handheld calculator.

Let's work out the math for the biggest example above: the $25,000 down payment on a house. We'll assume you're already al-most halfway there and say that you have $12,000 earning 5 percent in a money market fund. In two years, assuming you're in a combined 33 percent state and federal tax bracket, that $12,000 will be worth just over $12,800, so you'll still need another $12,200. How do you pull it together?

Start with a rough guess. Looking at your take-home pay, you think you can put away $400 a month. Again, that'll go into a money market account earning 5 percent. If you put away $400 a month for two years, you'll have saved $9,600. A simple interest calculation on that earns you $480, so even before you take taxes into account, you know that $9,600 in savings won't be enough. What if you increase your monthly contribution to $500 instead of $400? In savings alone, that'll get you to $12,000. You know that taxes zap a little more than one third off the top of the 5 percent interest rate your money will earn, bringing it down to 3.35 percent. Now multiply $12,000 times 1.0335 and you'll find that your total return is about $12,400. That's close enough for me.

Siphoning $500 or however many dollars you've determined it's going to take to reach your goal out of your spending money each month isn't always going to be easy. There will always be a ski trip or a Christmas list or a new suit that looks more immediately attainable-and therefore more attractive. That's why it's crucial to make saving as automatic as possible. Arrange with your bank to have the proper amount deducted every month from your checking account and moved directly into your money market (or other short-term investment) so that you don't have a chance to spend it.

It also helps to keep those long-term goals in sight. Post little re-minders around the house where you're sure to see them to help you remember why you're not spending $98 on that skirt in the window of Banana Republic. For years now, my friend Jonathan has had a picture of a waterfront home in Rye, New York, taped to the Talking Goals refrigerator of his apartment in New York City. He cut it out of the real estate section of the New York Times Magazine when the home was up for sale. Never mind that it sold years ago. It's like the home he knows he wants. It's something to keep in mind as he heads off to work each weekday (and often on Sundays), putting in many more hours than a salaried employee would to get his start-up business off the ground.

Revisit Your Goals

In the fall of 1999, my family got together on a Friday night and heard some great news: My brother Eric and his wife, Gabrielle, were expecting a baby. Then the phone rang on Monday with some even greater news. It was twins!

Even though they were ecstatic, the good news threw their financial plan out of whack. They had figured on staying in their one-bedroom apartment in Manhattan for at least a year, maybe two. It had a small dining alcove that could easily fit a crib for the babies. Now it seemed they'd have to buy a two-bedroom place or house soon after the kids even arrived. And-not knowing how Gabrielle would feel about going back to work-they were only going to look at places they could carry on Eric's salary alone.

My point is this: Life is a moving target. You plan on spending $2,000 to repair the kitchen in your new home, when all of a sudden the roof goes, too. Or your aging parent needs to move in. Or your cat needs dialysis. Or you visit Santa Fe and decide, "The heck with the East Coast," and start packing your bags. Or, like my brother and sister-in-law, you have twins. It happens. On my husband's side of the family, it happened to the same sister twice!)

The best way to rid your stomach of the butterflies this sort of a financial roller coaster brings is to sit down, once again, to talk about what these changes mean to your life and to run the numbers. Some people find numbers frightening. I find them very reassuring. It's nice to know that having a second baby doesn't double the charge for labor and delivery, it only raises it by a third, that buying a new dishwasher only costs double what it would cost to fix your old one (not five or six times the cost of the repair as you might have been imagining) or that even though you went insane with your gift buying at holiday time you can pay it off by April if you cut back on a few small nonessentials. Then you can sit back and live-even enjoy-your life.

Copyright © 2001 by Jean Sherman Chatzky. All rights reserved.

About the Author

Known to millions of readers and tv viewers, Jean Chatzky is the financial editor of NBC's Today show and also appears on CNBC. She is a regular columnist for Time, Money, and USA Weekend magazines. She is also the author of Pay It Down!