How To Set Financial Goals That Will Set You Up
A new year is not the only time you should focus on goals. Any time is a great time to improve something for yourself. Today is a great day to improve your finances. Financial health is just as important as your physical health. You may not even know if what you are doing with your finances is good or bad. A good place to start is determining if you have a budget. If you do not, you are not in the best financial shape you could be. When you have a budget, you gain an understanding of your money and how you are spending it. Creating and sticking to a budget should be one of your goals. Continue reading to understand how to set financial goals.
What Are Financial Goals?
Let's have a little real talk for a moment, many of us have no clue what to do with money. We know we make it and we know we have to spend it. We have no clue how we should be spending or saving our money. It is not our fault. We were never taught. We can only use that for so long, though. We have access to so many resources and tools we can no longer use "I didn't know as an excuse". Buckle up because by the end of this article, you will know how to set financial goals and begin to stick to them.
Financial goals give you the ability to set yourself on a path to a more financially stable future. You are probably used to setting goals, even if they are not financial goals. You have set goals for yourself all your life. Perhaps you wanted to graduate from college or you wanted to lose some weight, they were all goals that you needed to set for yourself. You needed to commit to them and follow through to the end. That is the same kind of commitment you need to have when you make financial goals. For some reason when you add money into the mix, it makes things complicated for many people.
The best way to create financial goals is to take a look at your finances and determine what you want to change. You should also figure out where you want to be in one year, three years and five years from now. Those goals can help motivate you to move towards the things you want to accomplish.
How Do I Set Financial Goals?
When you are considering how to set financial goals, you need to determine what is important to you. You should consider what you want your long term goal to be and then you can begin to set short term goals that help you achieve the long term one. Starting is probably simpler than you realize it is. You can start by listing out the items that are important to you when it comes to your finances. Sit down and have a conversation with your family to see what types of things you want to accomplish as a family. You may find that your spouse has some different ideas from you. You want to make sure that you are in agreement about the goals you want to work towards. You cannot have goals that conflict with the goals of your family, or you may find it really hard to reach your goals.
You can talk to your friends or other family members to see what goals they have, or what the feel is important. They may mention something that you did not consider. You can ask yourself some common questions. The answers may help guide you towards your goals.
What is most important to you, a new car, a new house, or early retirement?
Do you want to retire in the place you currently reside?
Do you want to be debt free when you retire?
Do you have immediate needs? Overdue bills? New appliances? Car repairs?
Where do you want your finances to be in five years?
Are there items that are must haves for you?
The answers to these questions can help drive your goals. When you have a good idea of these answers, they can help you understand what it important to you.
What Are SMART Goals?
When you are determining how to set financial goals, you want to set realistic financial goals. A great way to do this is to set smart financial goals. These are goals that are:
Specific
Measurable
Attainable
Realistic and relevant
Time restricted
This is an acronym that is used to talk about a method that is commonly used to set realistic and clear goals. That also means that they are usually easier for you to accomplish and you feel good about them. One thing to understand is you can have a concept about what you want or you can set a goal to achieve it. A concept is 'I want to be debt free'. You can easily turn that concept into a goal, but you have to put parameters around it.
The first step you need to take is to be Specific about your goal. Being debt free is too vague. You must be clear about your intention. You need to answer questions to make it specific. Who? What? Where? When? Why?
Who is involved? What do I want to accomplish? Where will this happen? When will this happen? Why do I want it to happen? When you are setting your goal, you should have answers to all those questions in your goal. So your concept of being debt free changes to a goal like this:
I have $20,000 of debt. I want to begin paying off my debt by creating a budget that allows me to take any extra money and pay off my debt. I want to have my debt paid off in three years.
Measurable and Attainable
Being specific is only the first step to consider in how to set financial goals. You also need to make sure that your goals are Measurable and Attainable. The only way you can actually say that you achieved your goal is to be able to measure it. As you begin to measure it, you have a clearer picture as to whether or not you need to adjust your goal. You may find out that you cannot do what you want in the time you have allowed and you have to adjust. That is ok; sometimes we set goals that are not able to be achieved in a set timeframe and we have to adjust. Finances, budgets, and goals must have some flexibility to them.
For a goal to be measured, you have to be able to answer how much? In the case of the goal I presented, the how much is $20,000 of debt that you want to pay off. To make it even more measurable, it can change to:
I have $20,000 of debt. I want to begin paying off my debt by creating a budget that allows me to take any extra money and pay off my debt. I want to have my debt paid off in three years. I want to pay off $6,670 a year for three years.
You also have to make sure that your goal is Attainable. You do not want to set yourself up for failure and you want to make sure that you are not relying on someone else to help you. All you can rely on is you, because that is what you can control. When you set your goal, you need to set it with the amount of money you currently make. You cannot assume you will get a raise or a higher paying job. You know how much you currently make, so you must use that amount. A goal that is attainable tells you how you know when you have reached your intended result.
In the case of the goal stated above, do you know that you have an extra $6,670 to apply towards your debt? Once you see the number written down, perhaps you realize that is not attainable, but you know you are currently putting $5,000 per year in your savings account and you are willing to decrease that to $1,000 so you are putting $4,000 towards debt. Now the goal changes to:
I have $20,000 of debt. I want to begin paying off my debt by creating a budget that allows me to take any extra money and pay off my debt. I want to have my debt paid off in five years. I want to pay off $4,000 a year for five years.
Realistic and Timely
When you are learning how to set financial goals, you have to keep them Realistic. Remember earlier, I mentioned that once money gets involved, people feel like they no longer know how to reach their goals. They feel like they have no control over their money. Often times, people set themselves up for failure and when they cannot reach their goal, they are like I knew I could not pay off my debt. Instead of doing that, try setting a goal that is achievable. It also must make sense in your life and not interfere with any other goals that you are aiming for. Taking another look at the goal we have set, is it realistic? Are you hurting your savings too much by taking that much away from it? There are some advisors who say as long as you have $1,000 in a savings account, you can put the rest of your money towards your debt until it is paid. Then you can focus on saving again. That answer may not be as clear for you. Do you have more than $1,000 in your account? Do you feel comfortable with where you savings are for now that you are willing to only put $1,000 or $0 per year in it? If so, then the goal you have set is realistic.
I have $20,000 of debt. I want to begin paying off my debt by creating a budget that allows me to take any extra money and pay off my debt. I want to have my debt paid off in five years. I want to pay off $4,000 a year for five years.
Time restricted also helps you to make sure your goals are achievable. If you set a realistic timeframe around them, then not only can you reach your goal, but you can set mini check points in along the way. For the goal you have now, you can check in every year to ensure you have paid at least $4,000 towards your debt.
How Should I Prioritize My Goals?
When you are learning how to set financial goals, you have to understand what is most important to you. You can go back to the list you created early on to see what you said is important. You should also understand that what is important to you may change as you grow older and your life circumstances change. Also keep in mind that what is important to you is not the same as what is important to someone else. It may be more important for you to be debt free by the time you are 50 and you are willing to slow down your savings. On the other hand, it may be more important to you that you have a set amount of money in your savings account and you are willing to hold on to your debt a little longest to make that happen.
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Do I Need A Budget?
It is really hard to figure out how to set financial goals without having a budget. A budget gives you clear information about how much money you make and how much money you spend. It also shows you where you are spending your money. It may also highlight the areas where you are spending too much money and need to cut back. Once you see where you can make cuts, that may free up more money to pay towards debt or save for retirement. You will not know until you sit down and begin figuring it all out. Creating a budget helps you take control of your finances.
Pay Off Debt?
I have talked a lot about paying off debt in my examples of how to set financial goals. I picked this goal because many of us have debt. Some of us feel like we are being buried by debt and the best way to correct that is to pay it off. It often seems like an impossible task and it does take time, however, it is not impossible. Not only does paying off debt remove the chains from around you, but it has other positive impacts. Paying off your debt increases your credit score and decrease your debt to income ratio. These are all good for you and your future, if you need to take out a loan, or get insurance, or even look for a new job. Carrying too much debt is never good for you, so a great goal is to reduce or eliminate the amount of debt you have.
Should I Focus On Saving?
The other concept I have talked about when learning how to set financial goals is saving money. It does not matter if you are saving for retirement, vacation, a car, or simply just putting more money in your savings account, saving is always a good goal. And we suggest starting with a savings account.
If possible, you should try to focus on both paying off your debt and saving more money. If you have high debt and low savings, you may not be able to do both and you will have to pick one over the other. In that case, it should depend on what is truly important to you. No matter which one you choose, know that you must come back and focus on the other one as soon as you can. Having low debt and high savings is an overall concept for good financial health. You need to put that concept into a goal that works for you.
Conclusion
This article contains a large amount of information on how to set financial goals. No matter what goals you have, make sure that you have them. You also need to commit to them. It is one thing to take all of these steps to create these goals, but you have to make the effort and work to make them happen. You have taken the first step on the path of how to set financial goals, now, you need to keep going until you have achieved all of your financial goals.