Why You Should Set Financial Goals: Goal Setting 101
No matter how much money you make or how much money you spend it’s a good idea to set financial goals. Without any financial goals, you may not have any guidance determining what you save or what you want for the future. Goals give you a roadmap to get from Step A to Step B and beyond.
Financial goals help you to see your entire financial big picture more clearly. Setting goals allows you to feel like you’re in charge of your money.
You Know Where You’re Going
Instead of just randomly spending and saving what you make, once you set financial goals and the steps to reach them you will be more organized with your money. Having goals eliminates random decisions about what to do every payday.
Goals Guide Your Decision Making
Once you have financial goals and actionable steps to reach them you will know what you need to save, what needs to be paid, and what you can reasonably spend.
You Can Set a Plan to Reach a Goal
As you set financial goals you should also detail the plan for how you will reach it. Each step of your action plan should lead you to the next step that in the end, gets you to a financial goal.
You Can Track Your Progress Toward Your Goal
Now that you know where you are headed, you will know how close you are to reaching the goal. You can celebrate being a quarter of the way or halfway there when you are watching your progress. And you get that big payoff feeling when you meet your financial goal.
Goals Force You to Prioritize
If you are serious about your goals you are able to shuffle around your wants and needs to fully fund them. Having goals gives you the clarity of knowing what you want.
Goals Make You Accountable
If you set a goal and you fall off track you have to answer to yourself. If you make an impulse purchase decision that funnels money away from a step to get to a goal you have to re-evaluate and make a new plan.
Meeting Goals Gives You a Sense of Achievement
If you are able to crush your goal completely you will feel like a financial genius.
What are Some Common Financial Goals?
These are some very popular financial goals.
Pay off Short-Term Debt
This would be getting rid of a credit card balance or all of your credit card balances or some other obligation with a short lifespan.
Pay off Long-Term Debt
This goal tackles longer-term debt like car loans or mortgages.
Pay off Student Loan Debt
This financial goal reduces or eliminates lingering educational loans.
Fund Retirement
This goal is to increase the funding in a 401(k) or IRA to build wealth for retirement. Even if retirement seems like it is a really long way off it is never too early to start saving for it. You don’t want to get to retirement age only to find out you haven’t saved enough to actually retire.
Save for College
Sending a child to college is an expensive thing. Every dollar saved ahead of time is one less dollar on a student loan that will have to be repaid after graduation. Whether the loan obligation is up to the parents or the student, the smaller the loan, the better.
Increase Credit Score
Your credit score is a three-digit number that some large reporting agencies create based on your history of handling credit. The higher the score, the better. Having a high score impacts other things in life like whether you can qualify for a car loan or a mortgage. It may also determine the interest rate when you take out a loan. A lower credit score means a higher risk which means more interest.
Sometimes landlords, wireless carriers, and even prospective employers view credit scores during their decision-making processes. Some people with lower scores set financial goals to work on bringing the score up. That can be done by making every payment on time for at least the minimum amount due. But also managing a mixture of installment credit and open-ended credit well will positively impact a credit score.
Three of the largest credit reporting agencies are:
1. Experian
2. TransUnion
3. Equifax
Reduce spending-Many times people set a financial goal of reducing monthly spending, particularly on optional expenses. This not only frees up money for other categories it slows down purchases that may be added to high-interest credit cards that already have balances.
Stick with a budget-Setting a budget and sticking to it usually goes hand in hand with setting financial goals.
How to Set Goals
When you sit down to set financial goals you have to begin by being completely honest with yourself and the rest of your family. You have to determine what are the most important things for you to accomplish and see if your thoughts are in line with everyone else involved. At this stage, you may have to talk through the different lists of goals and compromise on what to work toward.
Whether your goals are short-term or long-term they have to be realistic or you are setting yourself up for failure. Your goals have to be something you can make a priority in your financial life.
It’s a good idea to write down or track goals. If you can see them and are reminded of them you are more likely to act on them. Beneath each goal write out the steps that it will take to get to the goal.
How to Change Financial Habits to Reach Goals
Most financial goals involve changing something that you have been doing with your money. If you are going to reorganize your spending it is best to set up a budget.
Creating a Budget
When you have a budget you are planning ahead how to appropriate your money. You tally up all available income, allocate money to concrete obligations, and then figure out what to do with the rest. You’ll always have to pay for housing, utilities, transportation, food, clothing, personal items, and entertainment. But once you set financial goals you’ll know if you want to redirect the leftover money to a retirement plan or to a savings account earmarked for a down payment on a home or maybe the extra money will be used to make extra payments on a loan.
Budgets can be sketched out on a pad of paper or populated into a simple spreadsheet or created using a budgeting app. No matter how you keep your budget it should be something you can physically see.
A budget is a great tool for calculating if you are living below your means. If you live below your means once all of your obligations are paid, you have money left over to direct where ever you please. That could be toward anything from paying off debt to making a contribution to your emergency fund. Strategies for living below your means include:
Track Spending
Keep detailed records of where your money goes. That includes essential expenses like housing and non-essential expenses like concert tickets.
Reduce Meaningless Spending
Once you are tracking spending you can see patterns of non-essential or meaningless spending. Meaningless spending will mean different things to different people and different budgets. One person may consider take-out gourmet coffee an essential part of every workday and another may decide it’s meaningless and pack a portable mug at home.
Don’t Rely on Credit Cards
If you have to put something on a credit card because you don’t have the cash on hand, you may put yourself in a cycle of using credit but not being able to pay the balance off when the bill comes each month. Only put something on a card that you know you can cover with cash.
Save for Big Purchases
Instead of relying on credit put together a targeted savings plan for big purchases. Sure, putting that new pair of skis on a credit card results in immediate satisfaction. But you can find long-term financial success by saving enough to buy the skis with cash and not accruing any interest on an unpaid credit card balance.
If you have set financial goals that involve saving money for several different things, it’s a good idea to park your savings in special accounts. If you’re building retirement savings that should be in an IRA or 401(k) account. But if one goal is save for a new car and a separate goal is save for a dream vacation, you can track your progress more easily if those are two separate accounts.
How Do You Stick With Your Financial Goals?
It’s one thing to set financial goals but it’s another thing altogether to stick with them. You may feel extremely excited and motivated once you have your goals in place but it takes momentum to see them through. One way to stay on track is to set smart financial goals.
SMART
This stands for:
Specific
Instead of just setting a goal to save money for a down payment on a house or to pay off credit card debt decide that you’ll save $5000 this year toward a down payment or you will clear the $7000 balance on your card in the next eighteen months.
Measurable
How can you save $5000 toward a down payment? You’ll have to redirect approximately $417 a month into the down payment. As you go through the steps to fund that goal you will be looking for places to pull those $ 417 dollars from each month.
Attainable
If you were only able to save $100 all of last year it might not be reasonable to make the jump to saving $5000 this year. You might have to start with a smaller financial goal to keep it in reach and not make you feel defeated if you can’t get to your goal.
Relevant
If you feel like you are tired of renting that can be a motivator toward reaching a goal of saving for a down payment. If you don’t want the responsibility of maintaining a home and a yard then saving for a down payment on a house isn’t that meaningful at the moment.
Time-Bound
Give yourself a deadline to meet a financial goal. Don’t make an open-ended financial goal like you will pay off that $7000 credit card balance sometime in the future. If you decide that 18 months is a reasonable time you will set up steps that work with the 18-month timeline. And once you get to that deadline, whether you have met the goal or not, you will be able to assess what part of getting to that goal is working or not.
It’s a good idea to check in on your progress toward your goals once a month. You’ll be able to see if you are on track and if not, make a correction before too much time goes by. If you are working with a budget, are tracking your spending, and monitoring your financial goals it shouldn’t take much extra time each month to tend to your progress.
One motivating factor toward meeting financial goals is seeing a quick benefit from the changes you have made. If you can see progress after you set financial goals you are more likely to keep going. And if you reach and conquer a financial goal, go ahead and reward yourself a little.
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Conclusion
There are many different ways to manage your finances. But if you want to take control of your money and your situation, you should set financial goals. Goals help you to see what you want to do with your money and guide your financial decisions. When you set financial goals you also put into place the steps that will help you get there. Once you make financial goals a priority they will influence most of your decisions about what to do with your money.
Common financial goals including paying off debt, paying off student loans, building a retirement or college savings fund, or saving for something specific like a car, a wedding, or a dream vacation.
It’s important to choose goals that are specific and relevant and attainable and they should come with an expiration date. How else will you be able to evaluate if you are making progress if there isn’t a due date?
When you set financial goals you put into place a series of decisions that helps you evaluate how much money you make and how you can best distribute it. Small tweaks like putting a little more toward retirement and spending a little less on entertainment can make a big difference.
And over time as you track your progress, you will be confident that you are making the right decisions about every single penny.