Does your money have a purpose?
When I start working with a new client, one of the first questions I ask is “What are your top three goals?” These are usually financial goals but they also often include life goals. That’s not surprising because money often helps us achieve our life goals.
On a few occasions I’ve had a prospective client counter with a different question, “How much money can you make for me?” To me, this is the wrong question because achieving financial independence begins with figuring out what really matters to you. Only when you have figured out what really matters can you then determine how to get there—and that may or may not involve earning a rate of return that varies depending on your goal, timeframe, and risk tolerance.
I worry about the people who ask this question, too, because it indicates making money with no goal or objective in mind. I feel like they are lost and may have missed their purpose in life. Money can solve many problems and we need a minimum amount to survive and pay our bills but after those needs have been met, we begin to ponder bigger ideas.
Don’t we do things in our life to fulfill a certain objective?
· Provide for our families
· Make our partner / spouse happy
· Do something fun
· Create family memories
· Reduce risk / improve our security
Often these take the form of a certain transaction:
· Save up to buy a new or more reliable vehicle
· Earn enough to put down a down payment on a home
· Take a big trip
· Pay off a mortgage and debts
If you are like most people, you have a checking and savings account for cash. The checking account is your transaction account where paychecks or other incomes are deposited and bills are paid. The money comes in and the money goes out but where is the intentionality of putting money aside for specific goals?
If our goals are important to us, shouldn’t our money have a purpose?
One of the ways that we incorporate purpose into our financial plans is by recommending the creation of specific accounts for specific purposes beyond just having a checking and savings account. With cash accounts this is relatively easy.
If you are planning a big vacation in two years and need to have $12,000, you can set up an online high yield bank account with automatic monthly deposits. You might think that you need to put away $500 per month to achieve that goal—not necessarily. Many online savings accounts are yielding 3.5-4% or more right now. So, you don’t need to save as much because you’ll be earning interest on your savings. To reach this goal, you’ll only need to put away $484 per month instead of $500 because your savings will be earning interest.1
Give it a name
Most importantly, give the account a name such as “Big trip in 2027”, “College for Maryanne” or “Vacation home in 2030”. By being deliberate, you solidify the purpose of your money. Most online accounts allow you to give the account a name. Do it. Then, every time you look at the account, you will be reminded of your goal and you’ll be able to see your progress towards it.
Once you have found a good online savings account, there is usually no limit to the number of accounts you establish. Label each one. While you need to find a good, solid financial institution and a great interest rate, I believe this is a better approach than only focusing on the interest rate. If you don’t have a purpose for the money, the account can be scooped up for some other random need or goal which can derail your long-term plans. We’ve seen this happen with those who have not thought through the purposes for their money.
An emergency fund comes first
Of course, having a purpose for your different money buckets can be difficult if you have not put aside an adequate emergency fund. Considered the cornerstone of any good financial plan, an emergency fund is there to cover the unexpected. In your early career years it may be there to help you cover the first, last and security deposit when you have to move unexpectedly to a new apartment. During your working years, its there to help you get through an unexpected job loss. Overall, an emergency is there to help you get through an unplanned and significant expense. Once that is established, you can then start assigning purposes to the rest of your money.
Identifying your goals and organizing your finances can be complicated. But one of the first places you should start is with assigning purposes to your money. If you would like to discuss how to give your money a purpose, give me a call. I’m here to help. You can schedule a quick call with me by clicking HERE.
1This illustration is hypothetical. Interest rates on high yield savings accounts can change at any time. You may be able to lock in higher rates by purchasing a certificate of deposit or short-term US Treasury securities (exempt from state income taxes). Contact your financial adviser for the most appropriate strategies to achieve your specific goals.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-653-3303
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