Have you ever set a financial goal for yourself with the best of intentions, only to find yourself derailed after a few months? If so, you're not alone. Just look at how many people start the New Year off with a brand new gym membership, only to stop going after a few months. It’s natural to feel lost or overwhelmed as you begin to think about setting and balancing financial goals. Start by answering this question: How do you define success?
Let's get back to the basics of financial goal setting so you can set yourself up for success.
What Are Financial Goals?
At first glance, this question may seem a little silly. The definition of financial goals seems self-evident. But sometimes it's easy to only look at the money-related goals (wanting to save $20,000 this year) and not the money-required goals that accompany the rest of your life (buying a house, taking a sabbatical from work, or funding your dream vacation).1
When you start to identify some of your financial goals, it's important to figure out which goals fall under short-term financial goals and which of your goals require a more long-term plan. In general, short-term goals are defined as any goal that will take three years or less to complete, while long-term goals may take three to five years to complete, or even longer.
Why is it important to identify a time frame for your goals? If your goal is to have $10 million saved in your retirement account by the time you're 65, it can be hard to stay motivated for a goal that feels so far away. By having a mix of short and long term goals you'll be able to build up successes to keep focused for the goals that will take a little longer.
Setting Financial Goals
Now it's time for the real work. When it comes to identifying your financial goals, leave no stone unturned in every area of life. What does your dream life look like, and how similar is it to the life you lead now? Where are the disparities? Most importantly, are you and your life aligned with your current financial goals? And if not, what do you need to do to close the gap?1
The importance of getting clear about the kind of life you want to live and writing it down is two-fold. First, you'll have a written record of what you want to do rather than have ideas floating around in your head. Again, this seems like a simple tactic, but it makes a difference to see your goals in writing in the physical world. Once they're down on paper, you can start to examine which parts of your life match, which ones don't, and start to close the gap. The second reason is that having something to hang onto is important when the going gets tough. Life happens, and without fail there will be some speed bumps along the way. Writing down your goals can keep you focused when the road gets rocky.2
Find your inspiration
Think not just about what you want to do, but why you want to do it. Attaching reasons for your goals can put them in perspective and fuel motivation. Something special happens when you put a pen to paper and write down your goals. You’re more likely to actually achieve them too. So, go ahead—make the commitment to yourself by putting them in writing. Then, stick them in your car, on your desk, or on your bathroom mirror. Make your goals measurable and specific. Don’t just say, “I want to be better with money.” That’s too vague. Narrow it down! Example:
- Build up a $15,000 emergency fund so you can afford to pay rent if you lose your job.
- Get rid of all of my credit card debt so I can put my income toward a wedding instead of interest payments.
- Save 10-15% of my income in a company-defined retirement plan like a 401(k) or 403(b) if your company offers one.
Goals Will Get You There
Financial goals will help you change your mindset, your habits, and your life. If you want to set yourself up to be financially secure, find small (or large) sacrifices you can make right now. The way you interact with your money today will impact your future.
- For example, if you don’t have financial goals, it’s no big deal to buy Starbucks every day. But let’s look at just how much those lattes are really costing you. You’ll typically spend $25 for just one work week of lattes—that’s $100 a month! What else could you do with that money?
- If you put $100 in an investment account every month for five years, your latte fund could grow into more than $8,000 thanks to the power of compound interest.
- If you were to invest $100 in an investment account every month your savings for 30 years, your coffee money could grow to over $280,000. A latte a day or a quarter-million dollars?
Find ways to eliminate seldom-used subscriptions and cancel them. Once you start to analyze all of the recurring subscriptions you may be shocked at what you spend on a monthly basis on just subscriptions: Netflix, Spotify, Hulu, Prime, Apple Music, Barkbox, unlimited carwash service, Hello Fresh, or Blue Apron etc.. While these are just examples it is critical to find out what subscription you have joined and decided whether it's worth keeping or not. Try not to use apps like Truebill as it will be just another annual subscription. Taking a hard look at your bank accounts and credit card statements will be more effective and also is done at no cost.
How Do Your Dreams Become Reality?
With your dreams written down, it’s time to create a plan that can bring them to life. You’ll need to figure out how much it will cost to achieve each of your goals, which can take a bit of research and some simple math. You’ll need to piece together a plan on when and how you’ll reach each target based on your income and expenses.
One of the easiest ways to turn each of your goals from dreams to reality is to use the SMART goal method. SMART is an acronym that stands for Specific, Measurable, Achievable, Relevant, and Time-Bound. By applying this metric to each of the goals you've defined above, you can create a simple plan for each one. Here's how we can apply the SMART method:
Let's use the example of saving $15,000 as an emergency fund.
- Specific: I want to build an emergency fund of $15,000.
- Measurable: I need to save $5,000 per year, which is $416 per month or about $14 per day.
- Achievable: My budget includes up to $1,050 of disposable income which enables me to save the targeted amount of $416 per month.
- Relevant: According to my income and expenses over the past year, I should be able to achieve this goal.
- Time-bound: I want to save $20,000 within three years.
Now that you have identified a SMART2 goal, it's time to get started. Make it as easy as possible to save by setting up automatic transfers to a special savings account that you know you won't dip into when a sale at Nordstrom tempts you. By making sure each of your goals follows the SMART framework, you can create a plan to actually achieve the things on your list. You’ll then need to stick to the plan, track your progress, and celebrate your wins.
Whether it's paying off debt, saving for retirement, funding education, or your dream trip, setting SMART financial goals will help you build the life you've always wanted. One day when you're lounging on a pristine beach, you'll have proof that you can set and achieve your financial goals.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.