By Jim Murphy, Personal Financial Management Counselor MCCS, Henderson Hall February 22, 2013
This is the final installment of a three part series discussing the theme of the 2013 Military Saves Week campaign theme: "Set a Goal, Make a Plan, Save Automatically."
Once we have written down one or more SMART (specific, measurable, active, realistic and timed) goals, the plan is easy. Recall from last week that to be a SMART goal, the goal must be must be specific, measurable, action-oriented, realistic and time-bound. To see how easy the plan is going to be, consider first the following five examples of SMART goals:
• We will get debt free. Our three credit cards are "maxed out" with balances of $2,000, $2,500, and $500. The interest rates are 19.9 percent, 14.9 percent and 10.24 percent and the minimum monthly payments are $40, $50 and $20, respectively. In addition to our minimum monthly payments, we can afford to pay an additional $140 per month, a total of $250. We used PowerPay to determine a payment schedule. We will be debt free in 24 months.
• I just reported to the Pentagon on my initial assignment after completing MOS training. I live in barracks, I use public transportation and I have an emergency fund. I want to save $5,000 for a down payment on a car to be purchased in two years. To achieve this down payment, I will save $208.33 per month for 24 months in a separate savings account labeled car down payment.
• Our average monthly living expenses including car payment and rent are $3,000. Our average monthly discretionary cash flow is $400. We have $4,200 in our emergency fund now. We want three months of monthly living expenses in an emergency fund before EAS. EAS is in November 2014, 20 full months from today. We will save $240 per month in a money market savings account to build our emergency fund to $9,000.
• Same family as example three. We want to start college funds for our one-month old twins. After saving for our emergency fund, we have $160 in remaining discretionary cash flow. We have asked the personal financial management counselor at our installation to help us identify well-regarded 529 plans. We will contribute $80 each month to each fund in order to have $1,600 in contributions in each account before we separate from active duty. That gets us started on an 18-year effort to help our children pay for college. We will continue the monthly investments in the plans once we are settled in our hometown.
• We are newly married. We are both 30 years of age. We want to have $1 million in a Roth individual retirement account by the time we reach full retirement age. The Roth IRA will be invested in a total U.S. market index mutual fund. While we are optimistic about the long term prospects of the American economy, we have based our calculation on a conservative annualized rate of return of 7 percent. Given our current ages, the time value of money calculation for monthly payment is $476.98. We will contribute $480 per month to the account. We realize that investment rates of return and compound interest calculations are not the same thing and that our investment will experience market risk through the time we have the money invested.
Each goal is specific, measurable, action-oriented, realistic and time-bound. Each is a SMART goal.
Finally, we need to make the plan as administratively easy as possible. The best method is to start allotments from our pay to the banks and to the investment companies that are managing our accounts. Referring to our leave and earnings statements, the money is deducted from our entitlements before our regular pay is sent to our direct deposit bank or credit union. We do not see it in our checking account. For that reason, we are not tempted to divert it to other purchases. And we do not have to remember to make the payment each month. Use of allotments is the most efficient way to save automatically.
Act on the chairman's encouragement. "Set a Goal, Make a Plan, Save Automatically." The theme is a proven formula to become financially independent by the time you retire.