Setting financial goals: Using the 5-10-15-20 concept

Thomas Charla

By Thomas Charla
Thomas Charla is director of business markets at MassMutual.
Posted on Apr 22, 2022

When it comes to establishing financial goals, for many, the hardest part is knowing where to begin. To help you get started, we created the 5-10-15-20 concept for setting baseline financial goals.

It takes short-term goals for income and savings and combines them with longer-term goals for retirement and debt to establish an overall plan for your strategic financial objectives. Once established, you can make tactical adjustments as necessary to meet your unique needs.

In detail, the 5-10-15-20 concept sets the following:

Goal #1: Increase your income by 5 percent this year

This may seem daunting at first, but if like many Americans you receive an annual cost-of-living salary increase of about 2 percent each year, you’ve already met 40 percent of your goal! Other options, such as joining the gig economy or monetizing a hobby, can help you reach the full goal. (Learn more: Setting income goals)

Goal #2: Save 10 percent of your take-home pay this year

Consider the 10 percent annual savings as an umbrella amount that gets allocated among all your saving priorities: emergency fund, vacation, college funding. Use direct deposit to "pay yourself first" and identify expenses to eliminate and redirect those monies to savings. (Learn more: Setting savings goals)

Goal #3: Target a retirement nest egg of about 15 times your annual gross income

Consider this mathematical equation: (Income X 15) X 0.05 = (Income x 0.75). Using this formula, a 5 percent annual return (0.05 in the above equation) on your nest egg of 15 times your income would, when taken as retirement income, equal about 75 percent of your current gross income. (Learn more: Setting retirement goals)

Goal #4: Have your debt (excluding your mortgage) paid off in 20 years

Inventory your current debt (student loans, credit cards, personal loans) and develop a pay-down schedule with estimated completion dates ("bad" debt gets paid first). Tackle one debt at a time and move onto the next. Monies from eliminated debt can be used for other debt or added to savings. (Learn more: Setting debt goals)

Set your baseline financial goals today using the 5-10-15-20 concept. After a year, there’s a good chance you’ll realize that the best part of working towards your financial goals is what you learned along the way.

Discover more from MassMutual …

Building your financial pyramid

How to be on a budget: The essentials

Managing debt in a balanced way

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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.