Our financial plan for the next 10 years
Being aware of major future expenses and planning for them can make life much simpler. Here's how we do it.
This post comes from Trent Hamm at partner site The Simple Dollar.
My wife and I are pretty diligent about planning ahead. We have frequent conversations about the future and we're pretty much in agreement on our financial plans and goals over the next several years.
I thought I'd share some of those plans and goals with you.
Known future events. These are specific future events we know are coming down the pipeline:
- Fall 2011. Our oldest child starts kindergarten, which will mean a reduction in child care costs. He'll be able to come directly home from school on the bus. We have a small educational fund for all three of our children that will help to pay for things like musical instruments, lessons and other such costs.
- Fall 2012. Our middle child starts kindergarten, which means yet another reduction in child care costs.
- 2015. Our first big family vacation, something we hope to make annual after that. We would very much like our children to have significant exposure to other cultures and have considered living in another country for several months. Our plan is that we're already putting $100 a month into a travel fund that largely won't be touched until this point. Minor family trips (such as a weekend trip to Chicago) are paid out-of-pocket and not out of this fund.
- Fall 2015. Our youngest child starts kindergarten, which further reduces our child care costs.
- 2015-2016. Both cars need to be replaced at roughly this point. Our vehicle with low mileage is the one that's used for Sarah's commute due to the outstanding fuel efficiency. Our vehicle with high mileage gets a lot less use. If the usage vectors continue, both will cross 175,000 miles in 2015. Our plan for this is that we’re already saving $300 a month for car replacements. When it comes time to replace one or both of these vehicles, we'll evaluate our savings at the time. Ideally, we can pay cash for both vehicles and get late-model used options for both.
Unspecified future events. These are events we're planning for in the future, but the timeline depends on a wide variety of factors:
- Retirement savings. We contribute roughly 10% of our annual income to retirement accounts.
- Education savings. We contribute roughly 4% of our annual income to education savings. We don't intend to fully pay for our children's education. Post continues after video.
- House payoff. Our mortgage is our lone outstanding debt at this point. Our largest financial objective right now is to get that mortgage paid off, so we're dumping extra into each month's payment. Right now, we're hoping for a payoff in 2015 or so.
- Country home purchase. Once our home is paid off, our focus will be on buying land and building a home on that land to our specifications. We hope to do all of this in cash (or possibly with a home equity loan on our current home, which would be paid off with the sale of that home. Our target for this is 2020 or so.
4 things to take home
So, what's the value in mentioning these things?
- Communication about money and goals is a key part of our marriage. It is a frequent topic of conversation. Because of that conversation, we're able to be in sync when it comes to our goals and our plans for reaching them.
- We save first and spend later. Rather than spending all of our paychecks, we contribute money to our various established savings goals and then spend what's left over. That means we live well below what we bring in. However, our finances for the future are quite secure.
- We are aware of big future expenses and plan for them. We have no interest in ever returning to a car loan, so instead we make "car payments" to a savings account. We do this for other things, too, such as large family vacations. When you live your life on credit and loans, you give an awfully big chunk of what you earn to the bank, which is silly, especially when you know such expenses are coming.
- By establishing target dates for things, we can make good investment choices. Our target date for retirement is far off, so we can invest a significant portion in stocks. Our target date for other things is much sooner, so we either have all of that money in a savings account or have only a small fraction of it in stocks.
It's all about having your money work for you toward your goals. The more you do that, the easier life becomes.
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