Financial goals represent financial priorities that are important to you. These goals may be long-term or short-term in nature, they might represent large amounts of money or a change in behavior.
How to Set Financial Goals: 6 Steps
Setting financial goals is an important step. While setting goals is important, how you set those goals is equally important to ensure that you have a shot at achieving them.
1. Decide What’s Important
Your financial goals should reflect your financial priorities. What’s important to you financially? This should be the foundation of your longer-term financial goals and should be kept in mind when setting short-term and intermediate-term goals.
2. Be Sure the Goal Is Measurable
In order for a financial aspiration to truly be a goal, you need to be able to measure it. If the goal is to accumulate a certain amount of money for a major purchase or for your children’s college education, how will you know if you’ve reached your goal if there isn’t a number attached to it?
3. Be Sure the Goal Includes a Time Frame
Along with being measurable, a financial goal should include a time frame in which that goal should be achieved.
4. Establish a Budget
In order to be able to fund your various financial goals it's important to establish a spending budget. This will give you a picture of where your money is going. How much do you need to meet your monthly living expenses? How much is left over after your monthly obligations to fund your goals? A budget can also be a tool to adjust your spending if needed.
5. Monitor Your Progress
This is a crucial part of the process. It’s important to keep track of your progress toward your financial goals to ensure you are on track to meet them.
6. Adjust as Needed
Goals can be established with the best intentions of doing what is needed to achieve them, but life can get in the way. Things can change, other priorities can arise. You may need to adjust your goals or make adjustments in other aspects of your spending to get back on track.
Examples of Financial Goals
Financial goals can cover a range of financial priorities from near-term goals to goals with a longer time horizon. Some examples of financial goals might include:
Paying Off Credit Card Debt
Reducing credit card debt frees up funds for other financial priorities. The interest on credit card debt can increase the amount of your debt exponentially in some cases. Getting rid of this debt as soon as possible can free up funds for other financial goals.
Building an Emergency Fund
Having an emergency fund can come in handy for the unexpected expenses that often come up in life. This fund allows you to cover the cost of most of these expenses without having to go into debt. It can be a big money saver over time. Generally having six months worth of living expenses on hand is a minimum amount for an emergency fund.
Saving for Retirement
No matter how old you are, saving for retirement should be a priority. In today’s world of fewer pension plans, saving for your retirement rests on your shoulders. Its important to allocate as much as you can as soon as you can to your retirement savings. If you have a workplace retirement plan like a 401(k) available to you this can offer a painless way to do this via deferrals from your salary each pay period.
Saving for College
For those with children, accumulating enough for one or more college educations is difficult task. Getting started early and saving for this goal on a regular basis is critical if you hope to be able to save a substantial amount toward college.
Living Below Your Means
This entails spending less on a monthly basis than your income can support. There are a number of ways to achieve this goal, including living in a smaller house, eating out less, taking fewer or less costly vacations and many more. This goal will directly tie in with the need to establish and monitor a monthly spending goal.
Short-term goals will tend to be very focused and will generally involve a time horizon of one to three years. This might include goals like saving for a new car or building an emergency fund.
These are goals that generally have a time horizon of three to 10 years. These goals take a bit more planning and persistence than short-term goals. Example might include saving for a down payment for a house, paying off your student loan debt, saving for a round-the-world vacation or saving for a wedding.
These are typically goals that will require a substantial amount of money to achieve. Accumulating this amount of money will take a plan and commitment to achieving the goal.
Long-term goals are those that will take a number of years to achieve. Saving for retirement is a prime example. One of the biggest allies those with a number of years to go is the “miracle” of compound growth. Those with 20 or more years to go until retirement can reap huge benefits from the compounding of the earnings on their retirement benefits. If those retirement savings are invested in tax-deferred accounts, the compounding has the added benefit of this tax-deferral.
Why Should You Set Financial Goals?
Setting financial goals provides a framework for determining what is important to you financially and what is required to achieve these financial milestones. Just getting a paycheck and spending randomly doesn’t allow you to focus on what’s important to you and your family.
Establishing financial goals, including an amount that is needed to achieve the goal and a timeframe to achieve the goal, allows you to set a plan to meet this goal. Sticking to your plan for these goals can help shape your attitude towards your finances and help provide a level of discipline that will carry over to all aspects of your financial life. This alone might be a good financial goal for many of us.