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How Do You Set Financial Goals?

| December 18, 2018
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Goals play an integral part in our lives. Without them, we don’t have anything to work towards. We have nothing to strive for.

This is even more clear in your financial life. But how does one create a goal? More importantly, what are good goals to set?

Figure out what matters to you

This should be your very first step when setting goals of any kind, especially financial goals. What’s most important to you?

Is it a vacation with your family? Sending your kid to college? Comfortable retirement?

Think of it this way, if there was something you could do and no constraints were put on you in order to get to that certain thing, what would it be?

Similarly, if, at the end of your life, you look back and there was something you regret, or there’s something your extremely happy you did, what would it be?

I think the answers to those questions would be a great starting point for setting goals.

Tiered approach

There will be goals in life where you will need to save for weeks, months, years, and decades. It’s, at this point, where you will have to break down your goals between short, middle, and long term.

  • Short-term - These will be smaller, less expensive goals. Buying a new car, taking a vacation, or saving for a down payment are all examples of short-term goals.
  • Mid-term - The most common mid-term goal I think of is saving for your child’s college education. These goals will span several years, to a decade or two. Depending on your commitment, paying off your mortgage could also be a mid-term goal.
  • Long-term - The most common and definitely most important long-term goal is saving for retirement. You will work and save for decades in order to afford a comfortable retirement.

Ultimately, saving for retirement, rather, saving enough for retirement will be challenging for most people. Gone are the days where pensions and social security could keep you afloat. It’s up to you to put that money away and invest it responsibly.

If you’d like to learn more about saving for retirement, go here.

Good goals

The list below contains several goals that we can all plan for and, hopefully, achieve throughout our lives. Along with the goal, I will also include a stat, that should stress how important it is

  • Six months savings for emergencies - More than half of adults have less than $1,000 for emergencies.
  • On track or ahead for retirement savings - Average retirement savings for people in their 40s is $63,000. At this point, you should have $200k to $300k.
  • Increase savings - The bottom 90% of earners save 4% and the recommended savings rate is at least 10%.
  • Decrease spending - Average spending for a household earning $75k per year is $4,800 per month.
  • Eliminate debt - Average household debt (not including mortgage) is $95k.
  • Save for a child’s education - A public 4-year college will cost $41k in 18 years.
  • Improve credit score - Average credit score is 687.
  • Adequate insurance coverage - Only 61% of people have life insurance coverage.

Budget

A budget will act as a plan for your goals. In addition to your standard budget line items (rent, food, insurance, etc.), you will include line items for your goals. These line items will be a monthly breakdown of what you need to save, invest, pay, etcetera to meet your goals.

If you want to have $50,000 saved for a down payment in 5 years, you’ll have to save, roughly, $830 per month. If you want to take a $10,000 vacation in 3 years, you’ll have to save, roughly, $280 per month. The list goes on.

No matter what your goals are, make sure the necessary plans are put in place. If you want to learn more about budgets, go here.

Monitor progress

Depending on the goal (short, mid, long) you’ll want to regularly check your progress. If it’s a short-term or mid-term goal, you’ll want to check in once a month. If it’ a long-term goal, once per year is probably enough.

In either case, check in as frequently as you want, just make sure you are checking in enough to review your progress and your plan in case you have to make changes.

Conclusion

Goals of any kind are extremely important. Not only does it give you something to aim for, but it also gives you something to track progress against. Figure out what’s important to you, set a goal, create a plan, and make a little progress every day.

One last thing. In many of my recent posts, I’ve talked about small, meaningful wins/progress/steps that ripple into big changes/achievements after years of compounding. This is something I got from James Clear. Author of Atomic Habits. He also has a blog. Definitely give his work a look.

If you’d like to learn more about setting goals and creating a plan to achieve those goals, visit our website.

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