When we first talk with clients, we ask the question, “what does money mean to you?” The meaning of money is different for everyone, but no matter what our emotional understanding of money may be, stripped of emotion, money is simply a tool for helping you achieve your goals in life. And that’s why it’s so important to learn how to define and set financial goals, make a budget, and save effectively to reach the goals you've set.
To define your financial goals, reflect on the things that you need money to accomplish? Maybe you want to take a vacation, save for a down payment on a house or car or start your own business. Like most people, you probably want to retire with enough money to live comfortably. Every person will have a unique set of goals.
Start by describing your goals in general terms, but then refine them with specific timeframes and dollar amounts. Ask yourself three questions: What do I want, what do I have right now, and how will I get what I want?
What we have learned is that getting specific and writing your goals down really makes a difference. For example, you might take the goal of "Retiring with enough money to live comfortably " and turn it in to a much more specific goal: What does “comfortable” mean to you?
Choose a target retirement age and calculate the estimated monthly costs to support your lifestyle in order to create a realistic financial plan to achieve your goal.
Remember, Goal setting is an iterative process—one that you will revisit as your goals change throughout your lifetime.
Think about your current wants and needs vs future wants and needs. It is always a balancing act between the present and the future.
It’s also important to think about the timing of each goal. As you start to list your goals, try to bucket them by the target date for each goal. Is the goal short-term, like taking a vacation next year, or long-term, like having money for retirement?
Short-term goals are easier to plan for, but it’s important to prioritize long-term goals.
It may seem hard to focus on a goal that is 20-40 years in the future, such as retirement planning, but starting early allows you to save smaller amounts on a monthly basis and reach your goals faster.
To reduce stress from your current and future financial situation, it is important to develop the habit of saving early, automatically, and often.
Start by building your budget based on your current lifestyle and cash flow. Make sure that you include your monthly savings goals in your budget.
First, take a close look at money coming in and money going out -- what you earn and what you spend in a given period of time -- every month, for example. The difference between your income and your expenses—both fixed and variable-- is your personal cash flow.
• Your cash flow summary will provide you with a better understanding of your spending habits, help you identify where you can cut back on spending and help you estimate how much you have available for saving and investing
We recommend that you begin by tracking everything you spend for a week. It's important to record both fixed expenses like housing and your variable expenses such as your smoothie at the gym or the latte you have every afternoon.
Then take time to reflect on what you spent—were there any surprises?
Once you review your spending, identify where you can trim spending by changing certain habits.
Assess where you could redirect your cash flow and save your money in a savings account, where it will earn INTEREST.
Interest is an extra amount of money that you can earn every year for keeping your cash on deposit. Remember that all savings accounts do not pay the same interest rates and those rates are variable.
Each year that you have your cash on deposit, your interest will earn interest. This is called compounding interest.
The more time your savings have to grow, the more they can potentially benefit from the power of compounding interest.
For example,
How much does my daily latte cost me each month? Each year? If I think about the power of compounding interest and if I saved that money each month, what amount could that grow to over the next 20 years?
That may sound like a small thing, but it can have dramatic effects. In this next example, Alex starts saving at age 25 and saves for 25 years, until age 50. Drew also saves for 25 years, but starts later, at age 40. Even though they both save the same amount, for the same number of years, Alex has much more money by the age of 65. That’s compounding in action.
We recommend a range of different strategies you can use to make saving part of your budget.
Pay yourself first, meaning treat the amount you save each month like an expense, and pay it before other optional expenses or discretionary purchases. Making automatic, regular deposits to your retirement account is an example of paying yourself first.
Plus, you will be able take advantage of matching contributions from your employer.
Build an emergency fund. Make this a top priority, and plan to save enough to cover 6 months of your expenses. You had to create your budget to know how much to set as a goal for your emergency fund.
Remember to revise your budget with each new life change—for example, when you have a new job, receive a salary increase, experience a job loss or decide to move to new city.
Setting up a routine for managing your budget and financial plan helps empower you to make good financial planning decisions
Last, it's important to understand what tax-advantaged accounts are and how the potential tax savings they offer can impact your saving and investing. These include retirement plans like 401(k)s or Traditional or Roth IRAs, education savings accounts, and certain kinds of health savings accounts.
For specific tax information, it's important that you check with your tax and legal advisors on what might be best for you.
Goal setting, budgeting, and saving can seem daunting at first. But it doesn't have to be -- make a plan and write it down! Revisit your budget on a regular basis and revise your financial goals as life happens.
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Disclosures
This video is for informational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circ*mstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC ("Morgan Stanley") recommends that investors independently evaluate particular investments and strategies and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circ*mstances and objectives.
Morgan Stanley Smith Barney (“Morgan Stanley”), its affiliates, Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving trust and estate planning and other legal matters.
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
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