Improving Financial Decision

One significant financial dilemma that individuals often face is determining how to divide savings for multiple financial objectives. Should you work on several goals simultaneously, or tackle them one by one in a phased approach? Essentially, there are two primary methods for setting financial objectives:

Simultaneously: Saving for two or more financial objectives at once.

Sequentially: Saving for one financial objective at a time in a step-by-step manner.

Both approaches come with their own advantages and disadvantages. Here’s how you can decide which strategy suits you best.

Sequential goal-setting

Advantages

Focusing on one goal at a time allows for deeper concentration and provides a gratifying sense of achievement upon reaching each milestone. Additionally, managing a single goal is generally more straightforward than juggling multiple objectives, requiring only one account to oversee.

Disadvantages

One downside is that the benefits of compound interest are not retroactive. If it takes several years to start saving for long-term goals, like a retirement plan, you miss out on interest accumulation during that time span.

Simultaneous goal-setting

Advantages

With simultaneous goal-setting, you avoid deferring the accumulation of interest for future objectives. Early investment allows for longer growth periods. According to the Rule of 72, an investment can potentially double in nine years with an average return of 8 percent. Thus, the initial years of saving towards long-term objectives are particularly advantageous.

Disadvantages

However, juggling multiple financial objectives can be complicated. You must allocate funds separately for each goal, frequently necessitating different accounts. Additionally, this approach may elongate the time required to reach any individual goal since savings are dispersed across several targets.

Research insights

In collaboration with Wise Bread, my colleagues and I conducted research into financial goal-setting strategies, recently published in the Journal of Personal Finance. We focused on young adults, with 69 percent of the participants aged under 45. The study examined four critical financial decisions: setting financial goals, homeownership, retirement planning, and managing student loans.

The findings revealed that numerous respondents preferred to prioritize their financial goals sequentially rather than concurrently, often putting off homeownership and retirement savings. Common phrases like “once I have…”, “after I [action]”, and “as soon as…” indicated a reluctance to pursue certain financial objectives before accomplishing others.

The most frequently cited financial goals among 1,538 participants included saving for various purposes, making purchases, and reducing debt. Notably, approximately one-third (32 percent) of respondents had outstanding student loans, which significantly influenced their financial choices. About 75 percent acknowledged that their student debt impacted both their ability to make housing decisions and their retirement savings plans.

Practical recommendations

Drawing on the study’s results, here are five approaches to enhance your financial decision-making.

1. Explore concurrent financial planning

Reconsider the habit of achieving financial objectives sequentially. Adopting a concurrent approach can harness the power of compound interest and avoid the common issue where the finish line of one goal dictates when you can begin saving for others.

2. Amplify positive financial behaviors

Increase any positive financial habits you’re already practicing. For instance, if you’re contributing 3 percent of your income to a retirement plan (such as an SEP-IRA if you’re self-employed or a 401(k)), think about boosting that to 4 percent or 5 percent.

3. Mitigate negative financial practices

Make a commitment to stop or at least reduce expenses that hinder your financial stability. Everyone has personal areas for improvement. When evaluating your habits, consider potential cost savings, health implications, and overall enjoyment.

4. Make sure to save for retirement

Alarmingly, almost 40 percent of respondents reported saving nothing for retirement. The decisions made today directly affect your future. Remember, any amount saved is better than none, and even small contributions—like $100 a month—can accumulate significantly over time.

5. Perform financial calculations

Utilize online tools to outline financial goals and strategies to achieve them. Planning can enhance your sense of control over your financial situation and inspire you to save more. Resources are available from FINRA and Practical Money Skills to help guide you.

What’s the most effective way to save for financial objectives? The answer varies for each individual. Ultimately, the vital aspect is that you engage in proactive measures. Evaluate the advantages and disadvantages of both concurrent and sequential approaches and adhere to a consistent savings plan that aligns with your needs. Every little step contributes to progress!

Enjoy this article? Pin it!