These 4 long-term financial goals can deliver lifelong security
Short-term goals deliver quick wins, but long-term goals set you up for sustained financial freedom.
Contributing Writer at Tally
October 21, 2020
Financial security begins with setting and adhering to financial goals. Without these goals, you may lack direction and not know if you're moving closer to or farther from financial security.
Short-term goals are important because they help keep you motivated. But long-term financial goals can have a more lasting effect on your financial security and wellness.
Because everyone has different paths in life, long-term goals will vary. However, several long-term financial goals are common among most people. We’ll cover these below, and explain what defines a long-term financial goal and why they're so important.
Long-term financial goals defined
Everyone has a different opinion on what long term means. For clarity and consistency, we'll define a long-term financial goal as anything that could take five or more years to complete.
Why long-term financial goals are important
Of all the financial goals you set, the long-term ones are among the most critical because they shape your short-term goals.
For example, if your long-term financial goal is to pay off $100,000 in student loans, you may create a short-term goal to build a monthly budget that allows you to pay extra toward that loan every month.
Setting financial goals and prioritizing them
Below is a list of common long-term financial goals. We organized them in the order to complete them. The first is the most immediate goal, and the last is the final goal to focus on after completing all the previous goals.
1. Build an emergency fund
An emergency fund is the keystone of any long-term financial goal setting. It's what holds your whole plan together if something unexpected happens. Without an emergency fund, one unexpected expense — like a broken water heater, medical bill, car repairs or job loss — can throw all your other financial goals off track.
Your emergency fund should cover at least three months of living expenses. If you work on commission or rely on variable income, you may want to save more.
Building that emergency fund takes a long-term plan, as saving three to six months of income will take some time. Create a budget and trim expenses, if needed, to a point where you can afford to put at least a portion of your income away in the bank.
If you also have debt to pay off, you can create a smaller emergency fund of about $1,000 first. You can then shift over to paying off debt and return to building that three- to six-month emergency fund.
Where you save your money for an emergency fund is important. This will be a large sum and has the potential to grow due to interest.
The average checking account with a balance under $100,000 pays just 0.04% interest while the average savings account and money market account interest rates are 0.05% and 0.08%, respectively. While these are relatively low-yield accounts, placing your emergency fund in a money market or savings account will allow it to grow more quickly while keeping it accessible.
It's possible to earn even higher interest yields from some banks, particularly those without brick-and-mortar branches. For example, some online savings accounts pay more than 0.50%, regardless of your balance.
You could earn more interest by putting your emergency fund in the stock market or other investments, but there are a few significant issues with this approach. For instance, if you want to access the cash in an emergency, you’d have to wait for the stock to sell.
You also risk losing money in the stock market. Because many financial crises are caused by recessions, there’s a good chance you’ll have to sell your stocks at a low point, resulting in significant losses.
2. Pay off debt
If your debt is relatively small, paying it off may be more of a short-term goal. However, with the average American having more than $6,000 in credit card debt, many people will need five or more years to pay it off.
If you fall within the average and have $6,000 in credit card debt at 19% interest and pay only the minimum payment, it could take over 10 years to pay off and cost you thousands of dollars in interest.
Create a plan to pay off this high-interest credit card debt and save big on that interest. You can achieve this with the Tally line of credit, debt consolidation or even a home equity line of credit. You can also choose an accelerated debt-repayment plan, like the debt avalanche or debt snowball.
No matter what process you choose, getting out of debt is a crucial long-term financial goal.
3. Save for a down payment on a home
Home ownership comes with risks, like repairs and potential depreciation, but it remains a big piece of the personal-finance puzzle. Being a homeowner helps you build equity and may even boost your credit score since it diversifies your credit profile.
Making a sizable down payment helps you get the best loan terms. Some home loans allow down payments of 3% or lower, but these often require pricey private mortgage insurance (PMI). PMI is insurance that protects the lender if you default on the mortgage, and the monthly premiums can cost you hundreds of dollars.
Set a firm budget for your future home and create a long-term goal to save 20% for a down payment. With 20% down, you can avoid a PMI, cover all the closing costs and get more favorable loan terms.
Like your emergency savings, put this cash in an interest-bearing account so it grows over time.
4. Retirement planning
Retirement is the ultimate long-term financial goal for many working Americans. Whether you plan to retire early or stick it out until you reach your late 60s, retirement is no longer about shutting down all work.
In many cases, particularly in early retirement, it's more about financial independence than freeing yourself from ever working again. It means you've earned the financial independence to do what you want instead of what a full-time job tells you to do.
For some people, their ideal retirement includes being a travel blogger, creating items to sell online or starting a business. For others, the traditional sandy-beach retirement may be the goal.
The primary goal of retirement planning is saving enough to live out the rest of your life. This amount will vary for each individual, but some experts suggest saving 15% of your annual salary starting in your 20s.
If you get a late start to retirement saving, the 15% rule may leave you short in your golden years. In this case, many experts suggest saving enough to cover 70-80% of your annual salary through retirement. Then there are the more aggressive experts who suggest simply saving as much as you can.
Short-term goals to ensure you enjoy retirement
Planning for retirement involves a few short-term goals. Reaching these goals can help you enjoy your golden years without financial stress.
Maximize your 401(k) employer match
Many employers offer a 401(k) plan, and most match a percentage of your contributions to help boost your retirement savings.
Some employers are more generous than others, but it's common for employers to match 50% of your contributions up to 6% of your yearly salary. So, if you earn $50,000 per year and contribute 6% of your salary to your 401(k), that’s $3,000 in savings. Your employer would contribute another $1,500.
This is free money, so you always aim to maximize that match.
If you can’t immediately maximize your 401(k), start at the highest contribution rate you can afford and increase it by one percentage point each year until you maximize the match.
Max out your 401(k) contributions
After maximizing your employer contributions, focus on reaching the 401(k) contribution limits to build your balance quickly.
Because you make 401(k) contributions before taxes, the IRS limits contributions. Every year, the IRS announces its 401(k) contribution limits, and you want to ensure you're hitting this limit each year.
In 2020, for example, the 401(k) contribution limit is $19,500. Those who are 50 years old and over can add catch-up contributions of up to $6,500 per year, bringing their max contributions to $27,000 per year.
Like maxing out the employer match, if you don't have enough money to hit this limit now, increase the amount by one percent every year until you reach the limit.
Contribute to an IRA
Once you've maxed out your 401(k) contributions, you can open an IRA to enhance your retirement savings further if needed.
You can choose either a traditional IRA or Roth IRA. You fund a traditional IRA with tax-deductible contributions, reducing your taxable income and income taxes. However, you pay taxes on all withdrawals in retirement.
With a Roth IRA, you make contributions using your take-home pay, so there are no immediate tax benefits. However, once you retire, the IRS doesn't charge income tax on Roth IRA withdrawals.
Like a 401(k), the IRS limits how much you can contribute to your IRAs. As of 2020, you can contribute up to $6,000 per year. If you’re 50 or older, you can contribute up to $7,000.
If you don't have enough money to reach the contribution limit yet, you can follow the same yearly one percentage point increase.
Other options for retirement savings
If you've maxed out your IRA and 401(k) contributions, but you still need more retirement savings, there are a few more options.
The stock market is a go-to place for retirement savings because there are no contribution limits and the returns are often relatively high. The downsides are that there are no tax deferments, you pay income tax on all gains and there is a risk for large losses.
If you’re younger, you can often afford to invest in riskier stocks and reap the rewards of big gains. If those risks result in losses, you have time to make up for them. However, as you approach retirement age, you want to focus on safer stocks with smaller, more consistent gains.
Health savings account
Health savings accounts not only allow you to set aside tax-free cash for health care, they can also help expand your retirement savings.
As of 2020, you can save up to $3,550 per year for single-person coverage or $7,100 for family coverage in an HSA. Like a 401(k), this is all pretax money. On top of your contributions, many employers will add funds to your HSA each year. Typically, this employer contribution is about $500 for individual plans and $1,000 for family plans.
Like other retirement accounts, if you lack the extra money to max out your HSA contributions now, you can slowly increase them by one percentage point of your income per year until you reach that yearly maximum.
Once you open and fund your HSA, you can use it to pay for all types of medical expenses, like buying over-the-counter medicine, copays or even surgery. If you use your HSA for any non-medical services or products, you're subject to a 20% tax penalty on that amount.
An HSA may not look like a good retirement savings supplement on the surface, but it can help in a couple of ways.
First, once you save a certain amount in your HSA, many banks will allow you to invest that money, allowing it to grow like a 401(k) or IRA.
Second, once you reach 65 years of age, you’re free to use any remaining balance in your HSA for any purpose, just like an IRA or 401(k). The IRS will charge you income tax on your withdrawals, but you won't pay the 20% tax penalty for non-medical use.
Long-term financial goals for a stable financial future
Building a secure financial future begins with setting short-term and long-term financial goals. Long-term goals may vary among people, as everyone has their own trail to blaze. But some of the common long-term goals include:
Building an emergency fund
Paying off debt
With these long-term financial goals in place, you can take control of your financial future and prepare to make any necessary adjustments if your life has an unexpected change.