How to Set Your Financial Goals
Money-saving undertakings fail because people lack well-defined goals and plans that would help maintain motivation. Saving money should not be driven solely by a sense of obligation. Don't save money because you're supposed to save money. You should know why you want to save money, how you do it, and when you intend to reach your desired savings. Have compelling reasons to save by setting concrete goals.
Why You Need to Set Goals
Reason #1: Setting a goal naturally focuses your attention on the subsequent step - creating a well-defined action plan for achieving the goal. A specific goal accompanied by an actionable plan clarifies what success or accomplishment means to you and outlines the necessary steps toward achieving what you desire. It serves as a map, offering pathways to reach your objectives. Without a concrete plan, it becomes too easy to be swayed by distractions and lose motivation.
Reason #2: When you allocate your savings towards a specific goal, you are less inclined to spend them frivolously. Mentally designating this money for a particular purpose establishes its intended use and prevents it from being used for anything else. As you consistently progress towards your goal and witness your savings grow, you are motivated to continue pursuing your objectives and are less likely to give up.
Reason #3: Well-defined goals also aid in selecting suitable investments based on your circumstances. A clearly defined goal helps establish the time horizon and appropriate risk level you can take on your investments. This information then guides the development of your investment strategy, helping you identify what constitutes a sound investment in your specific situation.
For example, if your goal is short-term, like saving for a down payment on a house in the next few years, it would be wise to consider investments that provide lower risk, predictable returns, and higher liquidity because you'll need access to the funds relatively soon. On the other hand, for long-term goals like saving for retirement, you may have the flexibility to take higher risks in your investments, considering the longer time horizon that allows you to weather market fluctuations and potentially generate higher returns.
Reason #4: Your goals should be a part of your budgeting process. It's crucial to account for all your priorities, including goals, when you decide how much money to allocate towards expenses and how much to set aside for savings. If you don't include your goals in your budget, you may inadequately allocate funds and fall short of meeting your goals.
Too Many Goals, Not Enough Money
At times, goals may seem unattainable, but it's important to remember that working towards financial objectives leads to positive changes and improvements. You can start by setting a bare minimum target, knowing that it's just the starting point, and adjusting your goal as you accumulate more resources. However, if you allow a lack of resources to discourage you and prevent you from taking the first steps toward your goals, the likelihood of never achieving them will be much greater.
You don't have to take on all of your goals at once. Begin with something manageable and gradually add more goals as you see progress.
Set Your Financial Goals
To begin, assess your current situation or future expectations, and establish realistic goals that you can measure. Determine the timeframe and necessary actions to achieve these objectives.
Specific
Our dreams provide motivation but are often too vague to serve as clear goals. Your goals should be specific, enabling you to develop an actionable plan to attain them. For example, aiming for "financial freedom" is a broad objective. To make it more meaningful, you need to define what financial freedom means to you, such as having a specific amount of money in your emergency and retirement funds, or any other specific criteria that hold significance to you.
Realistic and Achievable
Your goals need to align with the reality of your life situation. While purchasing an island may be a dream for many of us, it's not a realistic goal. Similarly, paying off a large credit card debt within a month may be unrealistic, turning it into a wish rather than a goal. However, this doesn't imply that your goals should be easy. They can be challenging, but they should still be attainable. If a goal seems overly challenging, you can try to break it down into smaller, more manageable objectives.
Measurable
Your goals should be measurable, allowing you to track progress and hold yourself accountable. Without measurability, it becomes challenging to gauge if you're making adequate progress toward your goal or if you will achieve it at all. For example, "Save more money" is not a measurable goal. A goal like "Save $100 per week" lets you easily measure and monitor your progress.
Time Bound
Goals should include a clearly defined target date or deadline. Establishing a time frame helps break down your goal into manageable steps and ensures that you have the necessary funds when needed. For instance, if your goal is to purchase your first used car within a year, the specific time frame guides you to save $105 per week, enabling you to reach your goal within the desired timeframe.
An Example of a Specific, Realistic, Measurable, and Time-Bound Goal
A specific, realistic, measurable, and time-bound goal for creating an emergency fund could be:
Save $3,000 as an emergency fund within the next 12 months by setting aside $250 a month from my income."
Try our savings goal calculator, which makes it easy to calculate how much you need to set aside every day, week, month, or year to achieve your goal within a specific timeframe.
This goal is specific as it clearly defines the desired savings amount of $3,000. It is realistic and achievable based on personal circumstances and income levels. It is measurable because it sets a monthly savings target of $250, allowing progress to be tracked. Lastly, it is time-bound as it establishes a deadline of 12 months to reach the goal.
Examples of Financial Goals
Everyone has a unique vision of the future they wish to create for themselves. However, there are common financial goals that many of us share, such as saving for a down payment on a house, building a sufficient retirement fund, or attaining financial independence. Here are some life events common for many people that may require saving in advance. You can use this list as the starting point for developing your savings and investment plan.
1. Build an emergency fund. Unforeseen circumstances like illness, job loss, or significant unexpected repairs can occur without warning, making it essential to have a safety net. A well-funded emergency fund serves as a financial cushion during challenging times and can protect you from potential financial hardships and getting into debt.
2. Pay off debt. Today's society heavily relies on debt, and many of us find ourselves in its grip. Debt can significantly impede our financial progress, as borrowing money comes with high costs. A prudent goal for many individuals is to prioritize paying down high-interest debt, such as credit card debt or payday loans, as swiftly as possible.
3. Save for retirement. While retirement may seem distant and not an immediate concern, it is crucial to start saving and investing for retirement as early as possible. An early start allows your money to grow over an extended period. The power of compounding interest is a remarkable force that can significantly enhance your retirement fund. Unfortunately, not everyone fully realizes its potential impact.
4. Save for your children's college fund. Support future generations in achieving financial stability. One way to accomplish this is by contributing to their 529 plans, which can help pave the way for their educational pursuits.
5. Pay off your home early. It's worth considering investing if the returns from your assets exceed the mortgage interest. However, if this is not the case, there is no need to continue giving away your money when you have the means to pay off your home ahead of schedule.
6. Save for large purchases and significant life events. Setting aside for buying a house or a car, getting married, or other significant investments or life events is a much more prudent approach than resorting to debt. By planning and saving for large purchases - you can avoid the financial burden of borrowing.
7. Small goals. Your goals don't necessarily have to be grand in scale. Planning for smaller objectives, such as saving for holidays and vacations, or commemorating significant milestones like birthdays or anniversaries, can prevent financial strain and excessive credit card debt.
8. Build wealth. The term "building wealth" is quite broad, so it's necessary to define what wealth means to you. Ensure that you take specific, realistic, and measurable steps within a reasonable timeframe that aligns with your circumstances. Set clear parameters and objectives for accumulating wealth in a way that is attainable for you.
Revising Goals
Goals are not something you can just set and then forget about. As your situation changes, your goals will naturally evolve with it. Ensure you stay on track by regularly revising and updating your goals. Once you've identified your goals, keep the objectives clear, organized, and tangible. Consider using a worksheet or notepad to revise your goals and track your progress. This proactive approach will help you stay focused and accountable in achieving your objectives.
Once Again About the Importance of Goal-Setting
Without clearly defining your markers of success and accomplishment, you may find yourself lacking direction and wandering through life. Without setting benchmarks for yourself, it becomes difficult to assess whether you are making sufficient progress. Setting goals gives you a clear picture of where you are and where you want to be financially.