I set financial goals for myself each year. That helps keep me on track with my long-term financial plan. It also allows me to adjust my strategy as things change.
My long-term goal is to become financially independent by eventually generating enough passive income to cover my routine living expenses. Given that lofty aim, my financial goals for the upcoming year align with that desire to become more financially free.
Here are my top three financial goals, which I hope will inspire you to set some of your own.
Image source: Getty Images.
Increase the size of my emergency fund
I currently have a decent-sized emergency fund. It could cover about four months of my family's living expenses. While that's more than the three months many financial advisors recommend, I'm no longer comfortable with that level. I want to grow my emergency savings so that they can cover about six months of basic living expenses.
The primary reason is that I'm self-employed, and my wife does contract work part-time. We don't have the safety of unemployment to fall back on if we both lose our jobs. On top of that, our income fluctuates.
Furtheingrmore, as a writer, I can't help look over my shoulder at the capabilities of generative AI. While I don't think the technology will completely replace me in the future, I might not be able to attain the same income level if AI replicates the type of writing I do at a cheaper cost.
Given the uncertainties about my future income, I want to continue building a bigger emergency fund over the next year. My goal is to hit the six-month level by the end of 2026 by saving a little more money each month.
Grow my projected annual dividend income by 20%
Dividend stocks are my top source of passive income. My current annualized dividend rate would be enough to offset about 20% of my basic living expenses. My goal is to boost that number by 20% by the end of 2025, which would be enough to offset nearly a quarter of my costs.
I have a twofold strategy to achieve that goal. First, my current portfolio of dividend stocks consists primarily of companies that steadily increase their payments. For example, my top dividend payer is Energy Transfer(NYSE: ET). The master limited partnership (MLP) plans to increase its distribution by 3% to 5% annually. Another top payer in my portfolio is Brookfield Renewable(NYSE: BEPC)(NYSE: BEP). The renewable energy company expects to increase its dividend by 5% to 9% per year. Given my focus on dividend growers, I expect my dividend income to rise by at least 5% next year from increases alone.
The second aspect of my approach is to continue buying more shares of companies that pay higher-yielding dividends. That enables me to generate more passive income from every dollar I invest. For example, Energy Transfer and Brookfield Renewable currently offer 6.7% and 5% yields, respectively. That's much higher than the 1.2% yield I could earn by investing in an S&P 500 index fund.
However, I don't stretch for yield. I focus on dividend stocks backed by a strong financial profile. For example, Energy Transfer and Brookfield Renewable both generate stable cash flow backed by long-term contracts, have conservative dividend payout ratios, and investment-grade balance sheets. That enables them to pay a sustainable dividend that they can grow. I want companies that can increase their higher-yielding payouts, like Energy Transfer and Brookfield Renewable, not those that might cut their payouts since that would cause my dividend income to take a step back.
Increase my passive income from non-dividend investments by 25%
While dividend stocks are my primary source of passive income, I have been diversifying my portfolio outside the stock market over the years through alternative investments. I primarily make private real estate and private credit investments through online portals like EquityMultiple, Arrived, Groundfloor, and Fundrise.
Private real estate and credit investments tend to have higher yields than those found in the public stock and bond markets. On top of that, they have a lower correlation to the public markets. That makes them a good way to further diversify my passive income and lower my risk profile.
I have been increasing my allocation to alternative investments in recent years, which I plan to continue in 2025. My goal is to boost my projected annualized passive income from these sources by 25% in the next year. I aim to achieve that goal by continuing to invest in alternative passive income sources. I also have some non-performing investments I hope will resolve this year and start producing income.
My goal is to become much more financially secure in 2025
My near-term goal is to be able to live off a combination of my emergency fund and passive income for one year if needed. That would take the pressure off if I were unable to work. In the long term, I want to produce enough passive income to completely offset my expenses.I have a plan to get there, and I'm making progress toward my target each year.I hope 2025 will take me another step closer to my dream of becoming financially independent. I also hope you'll take some time this new year to evaluate your family's financial situation and make some financial resolutions of your own if you haven't already.
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Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and Energy Transfer. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
