10 Strategies for Improving Your Financial Decision-Making
Wise Bread Picks
A key financial decision that many people grapple with is how to allocate savings for multiple financial goals. Should you save for several goals simultaneously, or tackle them one at a time? Essentially, there are two primary approaches to financial goal-setting:
Concurrently: This method involves saving for two or more financial goals at the same time.
Sequentially: This approach focuses on saving for one financial goal at a time, following a series of steps.
Each method has its advantages and disadvantages. Here’s how to determine which strategy may be best suited for you.
Sequential Goal-Setting
Pros
Focusing on one goal at a time allows for intense concentration and a rewarding sense of completion upon achieving each target. Additionally, managing a single-goal savings plan is simpler, as it requires only one account to oversee.
Cons
One significant drawback is that compound interest is not retroactive. If it takes years to address long-term savings goals, such as retirement, you miss out on valuable interest accumulation during that time.
Concurrent Goal-Setting
Pros
By saving for multiple goals at once, you can take advantage of compound interest sooner. The earlier you set aside money, the longer it has to grow. According to the Rule of 72, an investment can double in about nine years with an average return of 8 percent. The initial years of saving for long-term goals are crucial.
Cons
On the flip side, managing multiple financial goals can be more complex. You need to allocate income separately for each goal, often requiring different accounts. This can also prolong the time it takes to complete any single goal, as savings are divided among various targets.
Research Findings
In collaboration with Wise Bread, I conducted a study on financial goal-setting decisions with four colleagues, recently published in the Journal of Personal Finance. Our target audience was primarily young adults, with 69 percent of respondents under the age of 45. We explored four key financial decisions: financial goals, homeownership, retirement planning, and student loans.
The results revealed that many respondents preferred sequencing their financial priorities rather than funding them simultaneously, often delaying homeownership and retirement savings. Phrases like “once I have…,” “after I [action],” and “as soon as…” were frequently noted, indicating hesitance to pursue certain financial goals until others were achieved.
The top three financial goals reported by 1,538 respondents were saving for something, buying something, and reducing debt. Notably, about a third (32 percent) had outstanding student loan balances, which significantly influenced their financial decisions. Approximately three-quarters indicated that student loan debt affected both housing choices and retirement savings.
Actionable Steps
Based on our study’s findings, here are five strategies to enhance your financial decision-making:
1. Consider Concurrent Financial Planning
Rethink the conventional approach of completing financial goals one at a time. Concurrent goal-setting can maximize the benefits of compound interest and prevent delays in starting new savings once a goal is completed.
2. Increase Positive Financial Actions
Amplify any positive financial behaviors you’re already practicing. For instance, if you’re saving 3 percent of your income in a retirement account, consider increasing that to 4 or 5 percent.
3. Decrease Negative Financial Habits
Identify and reduce costly habits that hinder your financial security. Everyone has different culprits; evaluate potential cost savings, health impacts, and personal enjoyment.
4. Save Something for Retirement
Shockingly, nearly 40 percent of respondents reported saving nothing for retirement. The actions you take today significantly impact your future. Even modest savings, like $100 a month, can accumulate over time.
5. Run Some Financial Calculations
Utilize online calculators to set financial goals and devise plans to achieve them. Planning can enhance your sense of control over your finances and boost your motivation to save. Helpful tools are available from FINRA and Practical Money Skills.
Ultimately, the best way to save for financial goals varies by individual. The most crucial aspect is taking positive action. Weigh the pros and cons of both concurrent and sequential goal-setting strategies, and adopt a savings plan that aligns with your preferences. Every small step counts!
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Wise Bread Picks
A key financial decision that many people grapple with is how to allocate savings for multiple financial goals. Should you save for several goals simultaneously, or tackle them one at a time? Essentially, there are two primary approaches to financial goal-setting:
Concurrently: This method involves saving for two or more financial goals at the same time.
Sequentially: This approach focuses on saving for one financial goal at a time, following a series of steps.
Each method has its advantages and disadvantages. Here’s how to determine which strategy may be best suited for you.
Sequential Goal-Setting
Pros
Focusing on one goal at a time allows for intense concentration and a rewarding sense of completion upon achieving each target. Additionally, managing a single-goal savings plan is simpler, as it requires only one account to oversee.
Cons
One significant drawback is that compound interest is not retroactive. If it takes years to address long-term savings goals, such as retirement, you miss out on valuable interest accumulation during that time.
Concurrent Goal-Setting
Pros
By saving for multiple goals at once, you can take advantage of compound interest sooner. The earlier you set aside money, the longer it has to grow. According to the Rule of 72, an investment can double in about nine years with an average return of 8 percent. The initial years of saving for long-term goals are crucial.
Cons
On the flip side, managing multiple financial goals can be more complex. You need to allocate income separately for each goal, often requiring different accounts. This can also prolong the time it takes to complete any single goal, as savings are divided among various targets.
Research Findings
In collaboration with Wise Bread, I conducted a study on financial goal-setting decisions with four colleagues, recently published in the Journal of Personal Finance. Our target audience was primarily young adults, with 69 percent of respondents under the age of 45. We explored four key financial decisions: financial goals, homeownership, retirement planning, and student loans.
The results revealed that many respondents preferred sequencing their financial priorities rather than funding them simultaneously, often delaying homeownership and retirement savings. Phrases like “once I have…,” “after I [action],” and “as soon as…” were frequently noted, indicating hesitance to pursue certain financial goals until others were achieved.
The top three financial goals reported by 1,538 respondents were saving for something, buying something, and reducing debt. Notably, about a third (32 percent) had outstanding student loan balances, which significantly influenced their financial decisions. Approximately three-quarters indicated that student loan debt affected both housing choices and retirement savings.
Actionable Steps
Based on our study’s findings, here are five strategies to enhance your financial decision-making:
1. Consider Concurrent Financial Planning
Rethink the conventional approach of completing financial goals one at a time. Concurrent goal-setting can maximize the benefits of compound interest and prevent delays in starting new savings once a goal is completed.
2. Increase Positive Financial Actions
Amplify any positive financial behaviors you’re already practicing. For instance, if you’re saving 3 percent of your income in a retirement account, consider increasing that to 4 or 5 percent.
3. Decrease Negative Financial Habits
Identify and reduce costly habits that hinder your financial security. Everyone has different culprits; evaluate potential cost savings, health impacts, and personal enjoyment.
4. Save Something for Retirement
Shockingly, nearly 40 percent of respondents reported saving nothing for retirement. The actions you take today significantly impact your future. Even modest savings, like $100 a month, can accumulate over time.
5. Run Some Financial Calculations
Utilize online calculators to set financial goals and devise plans to achieve them. Planning can enhance your sense of control over your finances and boost your motivation to save. Helpful tools are available from FINRA and Practical Money Skills.
Ultimately, the best way to save for financial goals varies by individual. The most crucial aspect is taking positive action. Weigh the pros and cons of both concurrent and sequential goal-setting strategies, and adopt a savings plan that aligns with your preferences. Every small step counts!
Like this article? Pin it!
