Luckily, setting and achieving financial goals doesn’t have to be challenging when there’s a solid level of focus and effort. It will be hard at times, but at least the goals will ensure one doesn’t forget what matters most. So let’s discuss how to plan out finances for the things most people want in life. Better yet, let’s see how some of them could become a reality this year.
How to Set Financial Goals: Step-By-Step Guide
1. Write Down All of Your Personal Financial Goals
Without a clear objective, it’ll be impossible to determine where the money should go or for what to save. Having money floating around without a clear purpose could prove detrimental to the overall financial state of a household. Thus, the first thing to do now is to think about any and all financial goals one has.
2. Determine the Nature of the Goals in Question
For this part of setting financial goals, it would be wise to use the SMART method. Think clearly and consider all objectives that are specific, measurable, achievable, realistic, and timely. Each goal will have a monetary value. But more importantly, it should fit into a time frame. Depending on how many years it would take to achieve a goal, one can categorize them to determine which can be realized this year (or started at least):
- Short-term (can be delivered within a year)
- Mid-term (take about five years to accomplish)
- Long-term (will take over five years to become a reality)
To that end, here are a few examples most people go for:
Creating a Budget (Short-Term)
Without a clear budgeting plan, any and all financial goals one has may remain just a dream. Before one knows it, all the money will be spent on fixed and variable expenses, and there won’t be anything left to put into savings. Money has a way of slipping through the fingers of people who haven’t yet learned how to beat their bad spending habits. So opting for a budgeting strategy may just be the most important financial goal to set this year.
Of course, some budgeting plans will fit organized people more; others may get away with only using the “pay yourself first” method. But to see which suits them the most, one should start by tracking their expenses for at least a month. Afterward, it will be easier to recognize if zero-based budgeting is the right call or if they could put the 50/30/20 budgeting to good use.
Building an Emergency Fund (Short-Term)
One of the worst things about adulthood is having to cover any unexpected costs. In general, an emergency fund can be as small or as large as a person wants it to be. However, if it doesn’t cover at least three month’s worth of rent and bills, it’s not a real fund. Overall, most experts recommend saving about six month’s worth of living expenses. If one loses their job, it usually takes them a couple of months to pick up the pieces of their old self and find a new one (or switch careers).
Depending on how much one is earning right now, the time needed to create an emergency fund will obviously differ. If they’re living paycheck to paycheck because there simply aren’t enough funds for everything, they’ll save little by little. A separate savings account would come in handy then to avoid spending it all in one place.
So this can be a short- or a long-term goal. However, the work doesn’t end once there is enough money. It’s crucial to replenish the fund whenever something happens, and money has to be taken from it. Additionally, if someone finds another stream of income, it would be a good idea to boost the fund a bit. After all, with more money on their hands, their needs are bound to change!
Developing Multiple Streams of Income (Mid-Term)
And speaking of, one of the best financial goals to set this year would be to find that additional stream of income. Many people struggle to keep up with their budgeting plans because their income is simply not enough to live on. They usually give up after a month or two, losing any hope that their financial situation will ever improve.
The easiest solution would be to find a side hustle. Every person has a skill they can cash in on. And the range of side hustles is unbelievable right now. People can get paid for transcription if they’re fast enough typists. What’s more, they can even become part-time content writers and explore the world of the written word.
With a second stream of income (or multiple ones), the financial goals one has set can be expanded a bit. The line between reachable and unreachable changes because they will have more money for things they could never have imagined before, like a luxurious vacation.
Eliminating Credit Card Debt or Student Loans (Mid-Term)
There’s no way around it — any outstanding debt has to be paid off. Depending on how large it is, some people may only need a year to curb their spending habits and aggressively save to pay off a credit card balance. Others, though, may need about five years or more.
The problem with any debt, such as the one made with credit cards or student loans, isn’t in the fact that the money was used for something unnecessary. Nobody can say that college isn’t an investment that may pay off in the long run. However, the interest could pose a huge problem later on.
When it comes to students, for example, they don’t have to start making payments until they’ve graduated. A good way of getting out of the loan after the grace period (which some loans have) would be to save enough to pay more than the monthly minimum. That way, at least all that interest won’t accumulate so fast.
The same goes for credit card debt. It’s usually linked to a person’s shopping habits, i.e., lack of any self-control. But sometimes, people don’t have any other choice; they simply must charge things on their credit card.
Thus, once they start a side hustle or find a better-paying job and cut some of their expenses (move into a cheaper apartment, for example), they ought to aggressively pay more than the minimum each month. Better yet, they should start paying with cash only; when there are no credit cards around, they aren’t able to use them. Thus, going deeper into debt is not even an option anymore.
Paying Off a Mortgage (Long-Term)
Buying a home is a lifelong dream for some people. Unfortunately, it often comes with a mortgage and a hefty interest that has to be paid off in due time. And as much as one can make the monthly payments, those can severely strain a budget.
With a 30-year fixed mortgage plan, most people can provide for those monthly payments. However, it’s always better to work toward paying off the mortgage early. For one, it would give a household more financial freedom. They could use that money to pay off other outstanding debts; evidently, these can further destroy a budget if left unattended.
Best of all, paying it off early would mean that they could avoid the cost of interest that accumulates over the years the longer they have the mortgage. At the end of the day, that money can be used for other income-inducing ventures that don’t play a key role in keeping the roof over their head.
Saving for Retirement (Long-Term)
Finally, as one of the most common long-term financial goals, retirement is on everyone’s mind nowadays. Nobody wants to feel as if they’ve worked Monday to Friday with little to no vacation time at all for absolutely nothing. Thus, many actually decide to start putting the bulk of their savings toward tax-advantaged retirement accounts as early as possible.
But how early should they begin saving? As it turns out, it’s a rather bad idea to start putting money toward retirement when there’s some outstanding debt. It’s even worse if one doesn’t have an emergency fund.
Once all of those savings are taken care of, an individual should start saving 15% of the household income. The earlier they start, the better (in their twenties, for instance), as yearly contributions to 401(k) and IRAs are limited until one is 50+ years old. But even if they cannot meet the 15% benchmark, starting somewhere is a must. If they can save only $25 each month, that’s always better than saving zero, or worse, spending the money on something that won’t be necessary later in life.
3. Examine How Much Money You Have and Your Earnings
After going through these goals, most people may already know what they should focus on. However, before starting to save, it’s vital to examine the following:
- Net worth
- Income tax situation
- Current budget (if there is one)
Without knowing where these four factors stand, it might be impossible to start saving anytime soon. What’s more, knowing the numbers beforehand would allow them to quickly choose from some specific financial goals. If one has outstanding debts, they obviously shouldn’t start by saving for a luxurious vacation. On the other hand, if they don’t have any debt, they can consider looking into retirement savings now.
But all of that would be impossible if there isn’t a budgeting strategy in place or even a glimpse of an emergency fund. Thus, it’s imperative to start from those and cut as many expenses as possible this year to make room for some substantial financial goals.
A good rule of thumb is to save $1,000 first — that’s how much a starter emergency fund usually is. With the help of a solid budgeting plan, that amount can be then expanded until one has enough to survive a few months without a job.
4. Take Inflation Into Account
When it comes to mid- and long-term financial goals, which could take years to fulfill, it’s necessary to account for inflation. The value of the money one has right now might not be the same in ten or twenty years. Thus, when the time comes to fulfill some of their long-term financial goals, they may come out short and have to scramble to find another source of income so as not to lose all the progress.
An excellent (and rather) simple way of determining how much to actually save with inflation in mind is to use the rule of 72. In general, this formula is used when calculating how long it would take to double invested funds at a specific annual rate of return. More precisely, it applies to compound interest, which is often difficult to calculate in advance if one is clueless regarding investing.
To illustrate, at 3% inflation, the purchasing power of one’s money would be cut in half in roughly 24 years (72/3 = 24). It’s essential to account for that interest, as the monetary burden is likely to increase once one gets closer to their goal.
5. Track Your Progress and Incentivize the Process
One of the best ways of tracking the progress behind some financial goals is to use technology to one’s advantage. Creating a decent spreadsheet would be enough; one could quickly type in any sort of changes and immediately see if they’re on the right track.
Still, apart from tracking one’s goals, it’s crucial to track expenses as well. Even when there is enough money for everything, eliminating some unnecessary costs could make room for speeding up the fulfillment of some goals.
Finally, to make sure there’s enough motivation to follow through these goals, it’s a good idea to incentivize the process. Just because one is tracking every single penny and putting as much as possible into savings doesn’t mean they cannot treat themselves sometimes.
It’s imperative, however, not to go overboard and to set realistic, tangible mini-goals that won’t disrupt the whole budget. These objectives should be in line with the more significant financial goals one has set and work toward making those happen in the future.
How to Achieve Your Financial Goals
1. Automate Savings
Simply setting some money aside that one can spend whenever they want won’t do much good. Transferring the money immediately after getting a paycheck into a separate savings account might just help them resist the temptation of forgoing some of their financial goals and having to start all over again.
2. Build New Habits
To achieve some of these goals (if not all of them), one will have to accept some lifestyle changes. However, instead of seeing them as something disruptive, they ought to accept them as new habits.
It doesn’t have to be as challenging as it sounds, as any sorts of cuts will do. For example, most people have a hard time limiting their takeout habits and often spend a lot of money on groceries. They could easily save quite a lot of it by simply tracking where the best deals are and limiting takeout to once every two weeks.
Everything that one has currently accounted for in their budget can be reduced somehow. If they live in an expensive area and are always pinching pennies for rent, they can move. If the car they’re driving is draining their budget, they can opt for another means of transportation. What matters is to carefully examine the expenses and see which are a must and which aren’t. Chances are, there are plenty of savings hiding in plain sight.
3. Create Accountability
Serious savings require a lot of effort, especially if some of the financial goals don’t just include one person, but the whole household (such as a child’s college tuition). Thus, it would be wise to create some accountability among friends and family members. For example, everyone in the household should be on the same page, and if there are any issues, they all have to talk it through to resolve them.
Now more than ever, it’s also important to surround oneself with people who will cheer them on. Many will try to say that some of the goals will never become a reality, so it’s a good idea to avoid the naysayers. The people one should keep around are those who will be happy when they make progress and ready to give them a reality check when they’re failing.
4. Recognize Your Weaknesses
Everyone has some money weaknesses that are actually preventing them from fulfilling their financial goals. Whether it’s a severe case of shopping addiction or the idea that one has to keep up with the trends, it all comes down to spending a part of income that could be put into better use somewhere else.
Thus, while on the journey to achieving any of the financial goals one has set, it’s good to recognize these weaknesses and work on improving them. That might entail blocking every single shopping website on both the laptop and the phone. But if that’s what it takes to stop someone from spending their savings on non-essentials, that’s what they should do.
5. Don’t Be Too Hard on Yourself
Finally, it’s crucial to remember that sometimes, even the most detailed budgeting plan will fall through. Life is full of uncertainty; one day, people are happily going to work and getting each paycheck on time — the next, they are out on the streets because the company has gone under.
That uncertainty is reason enough an emergency fund should be the first financial goal one sets this year. The rest will follow easily as soon as one realizes that they’ve eliminated at least some of the stress in the coming months.
But even if one gets stuck at some point and feels as if they’ve failed completely, they shouldn’t give up just yet (or ever, for that matter!). Instead, they should take a moment to examine their mistakes and actually learn from them. There’s a good chance that’ll provide them enough insight to keep going, as well as identify and avoid any future obstacles. After all, now they know where the failure lies!
Setting and Reaching Your Goals
When it comes to setting and achieving financial goals, it’s important to remember that, for most people, it all comes down to trial and error. Reevaluation on a yearly basis is a must, as life changes quickly, and some things can never be foreseen.
Luckily, by knowing all the steps that someone should take, picking up the pieces even after a failure won’t be too difficult. The show must go on if one wants more from life, and that’s what these goals are here for to begin with; they offer guidance and control over one’s finances so that money becomes a true asset for a comfortable lifestyle rather than the means to fulfilling random whims and wishes.