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Prioritize Your Spending Now; Achieve Your Financial Goals Later

Creating a Financial Plan Can Help You Afford What You Really Want

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You want to save for retirement. You know you'll need a new car. You want to go back to school and get an advanced degree. And maybe – just maybe! – you'll finally take that big vacation.

How do you save for these financial goals with such a wide variety of target amounts and timelines? For one thing, you'll need to take a look at what you're spending on now so you can figure out how to save for these bigger goals down the road.

Here's how to clarify and focus your efforts:

1. Know Where You Stand

Before detailing your goals, take a look at your overall financial picture. Understand your credit, savings and debt picture, to make sure you're clear on your current commitments and what resources you might have available.

To assess your credit, look to your credit score. It's one quick, easy measure of your overall credit health. Once you know where you stand, you're in a better position to plan your next moves and your strategies for managing your credit, debt and savings.

2. Look at Your Expenses

In order to figure out how you can save, it's smart to first look at how you spend. "My philosophy is that if you count your pennies, the dollars will take care of themselves," says Ara Oghoorian, a certified financial planner for ACap Asset Management in Los Angeles. Oghoorian recommends using personal finance software to track your expenses over time, average out the amount you spend, then use that figure to prepare your next budget. "Once you've separated your fixed from your discretionary spending, carefully review each line item to see how you can reduce that expenditure," Oghoorian says. "Some fixed costs can be negotiated lower while some discretionary expenses can be eliminated."

3. List Your Targets

Brainstorm a list of your financial goals: A new dishwasher, holiday gifts for your siblings, a trip to Rome, a kitchen remodel. Write the target amounts next to each goal. Perhaps your trip to Rome will cost $5,000, the dishwasher $800 and buying a car with cash $24,000.

Don't forget to put retirement on the list. That's a more complex calculation, so use a retirement calculator to figure out your target amount for what's probably the biggest savings goal of your life.

4. Figure Out Your Timelines for Saving

Next, set the ideal deadline by which you'd like to meet each goal. You'd love to take that trip to Rome in July. You expect to need that new dishwasher by next Thanksgiving. You'd like to trade-in your car when it turns eight years old, which will happen three years from now.

5. Divide Targets by Timelines

Grab a calculator. Divide the amount you want to save for each goal by the number of months until your deadline.

If you plan on continuing your education and want $10,000 in your graduate school fund within 2 years, you'll need to put away $416 per month for 24 months. And if you want an $800 dishwasher within six months, you'll need to save $133 each month.

For more complex calculations like retirement that involve investing your savings over longer periods of time, refer back to that retirement calculator or an online savings calculator. And consider whether leveraging your credit might be a smart way to accomplish a financial goal like buying the dishwasher.

6. Tally and Adjust

Add up your ideal monthly goals. If the total exceeds what you can possibly save, as it will for many people, that's OK. Next you start dialing back.

There are three ways to do this: extend your timeline, shoot for smaller sums, or cut a few goals completely.

You might decide that you'll visit Rome a year later than you expected, giving you another 12 months to save. Plan on an $18,000 car instead of a $24,000 one, cutting your monthly contribution by 25%. And maybe that dishwasher can wait.

While making these calculations, don't forget that many experts recommend having enough cash on hand to cover six months' worth of expenses if you suddenly lose your income or have an emergency.

Tweak the goals until you reach a monthly sum that you can, realistically, contribute. Set up an automatic monthly withdrawal for that amount from your checking account to your savings account. You can even set up multiple savings accounts for specific goals.

For longer-term goals, like retirement and college, investigate tax-advantaged accounts like 401(k) plans, IRAs and 529 plans that specifically designed for those goals. If your employer's retirement plan offers to match your contributions, make sure you're taking advantage of that great way to boost your savings. Consider getting help from a tax, accounting investment or legal professional with these accounts and your overall financial plan.

Now relax and start planning that vacation.

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