A sabbatical to pursue your passion. A new business venture. Early retirement. Working toward these bold moves starts with these two steps: identifying how much you need and sticking to a plan to accumulate it.
“It’s finding out how much you can invest and making it a priority to do it,” says Will Larson, a Retirement Planning Strategist for Wells Fargo Advisors. “It’s setting goals and figuring out what you’re willing to sacrifice to get there, and then checking in regularly to monitor your progress.”
Larson and Dan Prebish, Director of Life Event Services, Products and Advice at Wells Fargo Advisors, recommend these five steps to help you follow your dreams.
1. Have the right frame of mind
Larson says it’s important to adopt a planning mindset when it comes to gathering enough money to help reach your financial and personal goals. A 2018 Wells Fargo Investment Institute study about the changing nature of retirement addresses this idea, which can also apply to reaching other goals such as pursuing your passion.
Key statements that define this frame of mind include:
- I can work diligently toward a long-term goal
- I prefer investing now, to ensure I have a better life in the future
- It makes me feel better to have my finances planned for the next one to two years
- In the last six months, I have set and achieved a goal or set of goals to support my financial life
2. Create and stick to a detailed budget
To get a baseline for how much you could set aside, Prebish recommends subtracting expenses from after-tax income (reviewing your tax returns from the past few years can help).
Then, take a close look at what you’re buying—if a purchase isn’t going toward basic needs or it isn’t offering long-term benefits, consider whether that money can instead be put toward your goal. For more details on creating this kind of detailed budget, see “Retirement Income: Do You Know What You Will Need?”
“A lot of people think of budgeting as a constraining exercise,” Prebish says, “but it can be liberating because you may discover you can actually invest more than you thought.”
3. Build an emergency fund first
Larson recommends having a financial safety net in place before you start putting money into an investment account. An emergency fund can help keep you on track financially if you’re faced with surprise expenses including major home repairs, a medical procedure, or a job loss.
Although the size of your emergency fund depends on your situation, a common recommendation is three to six months’ worth of salary, assuming you’re not living off pension or investment income only and assuming that you and your spouse are both working. That emergency fund should be in cash or cash equivalents to help ensure you can quickly access funds when you need them.
4. Discuss investment strategies with a financial professional
Larson and Prebish agree there isn’t a one-size-fits-all formula for using investing to reach your goals because everyone’s tolerance for risk is different. “Investing is like bouldering, which is rock climbing at relatively low heights without the use of ropes or harnesses,” Larson says. “You don’t want to invest or climb higher than you’re willing to fall.”
They note that a financial advisor can help you map out your risk tolerance. There are also tools, including questionnaires like this, that can help determine this as well.
“Sometimes folks underestimate what their capital can provide and how long it can last,” Prebish says. “Financial advisors have that experience from guiding other people through their retirement years. Most of us are used to getting money through our independent income. We haven’t had experience with earning money through investments.”
5. Revisit your plan to make any necessary adjustments
You should also plan to meet periodically with a financial advisor to see if you’re on track to have the funds to comfortably pursue your passion.
“Life can be a pretty expensive undertaking, not to mention the occasional curveball thrown in for good measure,” Larson says. “You need to confirm regularly whether your planned financial future is still on track with your goals.”
You and your advisor can discuss, perhaps annually:
- Any reasons your short-term investment goals need an adjustment.
- If you’ve dipped into emergency funds.
- How well your investment plan matches your risk tolerance. Is it too aggressive or not aggressive enough?
- Windfall funds that you could invest.
“Whether we’re talking about taking a sabbatical, starting a new business, or retiring early, carefully monitoring your spending habits is going to be a big benefit,” Prebish says.
“But you need to do the math first,” Larson says. “Math never lies.”