Breaking Down Financial Goals: How to Make Your Money Work for You
With the arrival of tax season, you might be thinking about getting your finances in order. After all, nearly 70% of Americans have less than $1,000 saved for retirement, and statistically speaking, you might fall into that bucket. But how should you actually start?
1. First, identify your goals: what are they, and when do you want to achieve them? These goals need to be specific, measurable, and obtainable. Something like “I want to achieve financial independence and retire comfortably” is too vague – what is financial independence? What is comfortable? Instead, let’s approach it this way: “I want to have 1 million dollars saved in 35 years’ time for retirement”. The goal is specific, measurable, and we now have a way to create a plan to get there!
2. Figure out how much you need: We can find out how much money we need to set aside every month by dividing the goal amount (ex: 1 million) by the number of months until your retirement date. So, in our example, 1 million divided by 420 (420 months = 35 years) would be $2,380 monthly set aside for retirement. But wait! That number is a little high because we’re forgetting something: the magic of compound dividends!
3. Select your investments: when you open a retirement account and deposit money into it, you can’t just drop the money in there and hope for the best. You need to select your investments! A popular option is to invest everything into a target date fund for the year that you’ll turn 67, which is the current retirement age in the United States (assuming you’re born after the year 1960). Let’s calculate how much you’ll actually need to contribute every month to your retirement account now that we’re investing in a target date fund:
Assuming an average annual return of 7% from your investments (a common but slightly conservative estimate for a diversified portfolio over the long term), your money will grow significantly over time thanks to compound dividends. Using this return rate, you can calculate how much you’ll realistically need to contribute monthly to reach your 1-million-dollar goal. In this case, instead of saving the full $2,380 every month, you’d need to contribute approximately $556 per month to hit your target in 35 years.
Here’s the breakdown of how we got to $556:
This is the formula we’re going to utilize:
FV = Future Value (your goal: $1,000,000)
- PMT = Payment Monthly (the value we are solving for)
- i = Monthly interest rate (.07/12) = .00583
- n = Total number of payments (35 years × 12 months) = 420 months
Calculation:
Using this calculation, you would need to contribute $555.76 per month or approximately $556 to reach $1,000,000 in 35 years, assuming a 7% annual return with monthly compounding. Don’t feel like you need to be a math whiz to figure out how to realistically plan for your future: you can use AI tools like ChatGPT or calculators from websites like Compound Interest Calculator | Investor.gov to do the math for you! But in this example, we were just talking about retirement goals. It’s important to remember that “specific, measurable, and obtainable” should apply to all of your financial goals!
Join us every month in 2025 as we break down real-life financial strategies—whether it’s distinguishing needs from wants or building a budget you can actually stick to. Let’s make 2025 your best financial year yet!
