Friday, November 30, 2018

Concurrent and Sequential Goal-Setting

Last week, an article about financial goal-setting by Liz Weston that I was interviewed for was published by The New York Times. The key point of the piece is that people can save for multiple financial goals at the same time rather than sequencing them one by one. By doing so, compound interest is not delayed on savings for long-term goals, like retirement, that come later in life. The earliest savings that people set aside will have the longest amount of time to grow.

Interestingly, some readers questioned this premise and argued for a strategy of tackling financial goals one small step at a time. Thus, I decided to explore financial goal-setting a bit more detail in this post.

Basically, there are two ways to approach the achievement of financial goals:
  • Concurrently; i.e., working on (saving for) two or more financial goals at the same time (multi-task)
  • Sequentially; i.e., working on one financial goal at a time in a series of steps (single task)
    Each method of addressing financial goals has pros and cons.  For example, you can intensely focus on one goal at a time with sequential goal-setting. It is also simpler to set up and manage single-goal savings than plans for multiple goals.
    However, the biggest disadvantage of sequential goal setting is that compound interest is not retroactive. If it takes someone up to a decade to get around to long-term savings, that is time that interest is not earned. The earliest years of savings toward a long-term goal are the most powerful ones. Based on the Rule of 72, you can double a sum of money in 9 years with an 8% average return. By delaying long-term saving, you can lose a full compound interest doubling period.
    So what is the best way to save money for financial goals? It depends. In the end, the most important thing to remember is that you are taking positive action one way or the other. Celebrate that fact, weigh the pros and cons of concurrent and sequential goal-setting strategies and personal preferences, and follow a regular savings strategy that works for you.

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