Divide conquer
How to set financial goals you can actually attain
Once millennials finally land a job, the euphoria of getting a steady, biweekly paycheque can easily be replaced by anxiety. Setting financial goals can be too overwhelming — there’s too much competition for too few dollars.
Should you dump any surplus in an RRSP, or is retirement too far off to think about? Should you put a portion away for a downpayment? If you have debt, should you even be considering anything other than paying it off ?
How can you set a financial plan and prioritize your money?
Karin Mizgala, founder of Money Coaches Canada, says the first step is to figure out your own values and principles, not just parrot other people’s ideas.
“I would really encourage young people to get really clear with what their priorities are. Not what society or their parents says is a priority,” she says. “You have to look inside and assess how valuable things are to you.”
So, just because your parents don’t consider you a real adult unless you have a house, for instance, you may enjoy the freedom that comes with renting.
Have a brainstorming session with yourself and scribble down what you want your future to look like. If you leave it “rolling around in your head” you’ll just get overwhelmed — write it down with pen on paper and don’t censor yourself.
“It is absolutely critical to spend time on these sorts of exercises,” Mizgala says.
Goals that should be included on everyone’s piece of paper are paying off debt, building an emergency fund and saving for retirement.
As for the rest, before you cement anything, do some detailed research.
How realistic is it to own a detached house if you also want to live in the downtown Vancouver? What’s the average cost for a wed- ding in your town?
You need to spend a lot of time figuring out the details, because you won’t be able to make a concrete action plan aimed at something vague. Review your goals every year as circumstances in your life change, like you get a partner, have kids or get a promotion.
“There’s no point in saying ‘I need a house’ if I have no idea what it’s going to cost me, or put no money toward it because ‘I’m not going to get it anyway,’” Mizgala says.
After you’ve come up with a few goals that seem achievable based on your interests and income, you’ll feel calm, and also excited.
“It’s really about being logical and clear minded about what your actual, real goals are so you’re energized,” she says. “They’re really your goals so you’re likely going to make the trade-off to really achieve the ones that are a priority. “
Determine an appropriate time frame for each goal. Divide them each into short term, (one to two years), medium term (two to seven years), long term (10 years) and, because you’re young, long term plus (more than 10 years).
Mizgala recommends dividing your savings into multiple accounts to help “make sure you don’t ‘steal’ from another goal unconsciously.”
“Use a high-interest savings account for short-term savings goals, like travelling within the year. Use a TFSA for mediumterm savings like a house downpayment, and an RRSP for longerterm savings,” she says. “It’s best to earmark and name the account with the goal that it’s meant for…. There’s no real advantage in terms of interest, unless it’s a big dollar investment, or the rate of return by pooling savings”
But before you can go about saving for any of these goals, you need to get control of your cash flow, something Mizgala says too many people neglect.
“Make sure you’re actually handling your money as best you possibly can,” she says. “It doesn’t mean you want to deprive yourself, but you want to make sure you’re spending in such a way that there is a bit of surplus.”
Budgeting and living modestly is the hard part. After that, logically, Mizgala says, you need to focus on paying off any debt.
“It needs to be a priority whether it feels like a priority or not, because it’s going to interfere with you other goals,” she says.
Mizgala recommends setting a date you want to be debt free, ideally within five years.
No matter how large your debt it, it’s still important to allocate a small amount toward your other longer-term goals, even if it’s just “a tenth of your surplus,” she says.
“I think it means you’re putting some attention on the future, and I think that’s a healthy way to approach living today.” she says. “Just put some toward getting ahead so you feel motivated and positive about your finances.”
Plus, if you’re a millennial, the biggest advantage you have is your age: Any investing you do now is worth five times the investing you’ll do when you’re older.
Once you’ve have paid off your debt, or are lucky enough not to have any, focus on building a rainy-day savings account of three-six months’ of living expenses.
“If something happens, in terms of you get laid off and you can’t meet your bills, then the rest of your goals are going to be thrown off track,” Mizgala says.
It’s boring, but being debt-free and having a cushion of cash in the bank are the basis for any fiscally responsible life. Once you’ve achieved these two things, congratulate yourself.
Then, one way to approach your other goals is to divide your surplus into thirds: one third going into each time category of your goals.
For example, “Of your (monthly) surplus, if you have $300, put $100 to travel, $100 to a house downpayment and $100 to retirement,” she says.
Of course, you can adjust this based on your real life situation — if you have a pension from work, for example, you may want to put two-thirds of your surplus toward a downpayment. Or if you’ve always dreamed of being on Say Yes to the Big Day, maybe put extra toward a wedding fund.
As time goes by and you start achieving your short-term goals, you can move to allocating more and more of your surplus to your medium and long-term goals.
Dealing with your money doesn’t have to be scary, and you don’t have to work yourself to the bone or give up everything you enjoy to get ahead financially. But you absolutely must act consciously with your money.
“Just getting an idea of what your goals are, they are going to lead to the decisions you make with your money and whether you achieve them or not,” Mizgala says. “I think there’s some real power there.”