Setting financial goals can seem so burdensome. From a young age, setting financial goals is a thing. There’s always an action figure you want to buy, and a fresh college graduate may set a goal to renting their first apartment. In this post, we have outlined some guidelines to set financial goals.
An article in BusinessWire from 2017 noted that 83% of Americans who set financial goals in 2017 felt better about their finances at that point. It is evident from this that setting financial goals will increase your financial confidence.
Let’s get started on how to set financial goals.
1. Find the inspiration behind your financial goal
The first step in setting a financial goal is figuring out the inspiration behind the goal. Why do you want to set a financial goal?
It’s not just about how you want to set this goal, it is also why you want to do it. Attach a reason to the goal so it can drive the entire process of fulfilling the financial goal.
For example, create a budget so that you can stop overspending, stop running into debt and start saving money. Or build an emergency fund so that you can have a source of income when you leave your job. Essentially, let there be an inspiration behind the goal which will be sufficient motivation.
2. Identify the nature of the financial goal
What kind of financial goals are you setting? Are they short-term goals, mid-term goals, or long term? Understanding the nature of your goals is critical to setting up a strategy for achieving them
Short-term financial goals should ideally last less than a year. Examples of short-term financial goals include
3. Creating an emergency fund
Emergency funds is money kept aside for emergency expenses. Having an emergency fund can be a lifeline when facing a sudden financial crisis such as losing a job or experiencing an unexpected car emergency.
When creating an emergency fund, some of the factors to keep in mind include; your income, and your budget. You can devote 10% of your monthly income for three months to the emergency fund.
4. Creating a budget
Creating a budget is another example of a short-term financial goal. With a budget, you can define your financial limits. According to Eleanor Bayley, who is a consumer advocate of the Certified Financial Planner Board of Standards. “managing your financial life without a budget is like driving into your future blindfolded.”
There are different approaches to creating a budget such as the 50/30/20 approach where 50% of your income goes to needs, 30% goes to wants, and 20% goes to savings and debt repayment. You can also use the 60/40% approach, where 60% of the income goes to committed expenses, and 40% of the income goes to different forms of investments.
Mid-term financial goals are sandwiched between short-term and long-term goals. They are goals that take between one year to five goals. For example, saving up for college, or saving money for the down payment on a house.
Mid-term goals can also include paying off student loans and taking a break from work. This kind of financial goal is a more hefty requirement than short-term goals. To achieve your mid-term goals, you may need a variety of sources of income.
Long-term financial goals take much longer years. The most prominent long-term financial goal is saving for retirement.
5. Plan SMART
When setting a financial goal, apply the ‘SMART’ strategy. Ensure your goals are:
For example, setting a short-term goal of saving for the college tuition of $40,000 while earning an income of $2000 is unrealistic. Be practical about your goals, are they doable? Can your income and expenditure provide room for such expenses?
The specificity of the goal is defined by the inspiration behind the goal. Then, there should be an actual target based on a proper assessment. For example, saving for a long desired vacation, you should have a measurable estimate of how much you would need for the trip.
Then, set a target date for your goals. Even if you are setting up college funds for preschooler, there should be an estimated timeframe for the college. Ensuring your goal is time-bound helps you keep your eye on the ball.
6. Track your progress
Finally, always track your progress.
After you’ve identified your goals, and set a target date, track your progress. You can do that using a spreadsheet, or a notepad.
Ensure that there are set timelines for the fulfillment of the goals. These timelines will help you monitor your progress. As you monitor your progress, you can gauge how well you are doing.