Setting different types of financial goals is essential when working toward the life you want. Whether you aspire to travel the world, start a business, or retire comfortably, having clear and achievable financial goals is key.
Let’s explore the importance of financial goals, define the different types, and review a few examples you use to get started.
What are financial goals, and why set them?
Financial goals are objectives you set for yourself to accomplish specific financial outcomes. They’re a roadmap that aligns your aspirations with your resources and then helps you create a plan to achieve them.
As you determine which types of financial goals you’ll focus on, make sure that each has a:
- Start date and estimated end date
- Estimated dollar amount, if saving or investing-related
- Specific reason you’re pursuing the goal
- Clear plan of action, or an outline of the steps you’ll take daily
Just like setting goals in other areas of life, setting financial goals provides the clarity and direction you need to stay focused.
Types of Financial Goals: Short-term vs. Long-term
Financial goals can range from a few weeks to several decades. The timeline depends on the type of financial goals you want to achieve and a realistic estimate of the time required to do it. Let’s explore the common categories of short-term and long-term financial goals first.
Short-term Financial Goals
Short-term financial goals usually span from a few months to a couple of years, and they’re focused on achieving specific outcomes within a relatively short timeframe. Here are a few examples:
- Saving money for a short vacation: Putting aside funds to enjoy a well-deserved break and create lasting memories.
- Creating a budget: Setting up a budgeting system to manage your income and expenses more effectively.
- Starting an investment account: Beginning your journey toward building wealth by investing in stocks, bonds, and other financial opportunities.
Long-term Financial Goals
Long-term financial goals require a more extended timeframe, often spanning decades. These goals are aimed at securing your financial future and achieving major milestones in life. Take a look at these examples of long-term financial goals:
- Paying off student and auto loan debt: Working toward financial freedom by paying off educational and vehicle loans in monthly installments.
- Saving for an emergency fund: Building a financial safety net to cover unexpected expenses and maintain peace of mind.
- Planning for retirement: Accumulating enough money to retire comfortably and enjoy financial independence during your golden years.
As you define your own financial goals, aim to have a mix of short-term and long-term goals that are aligned with your life stage and personal aspirations.
Common Types of Financial Goals
Financial goals are unique to everyone, reflecting their values, priorities, and aspirations. While your financial goals may differ from others, here are four common types of financial goals that most people set at some point in their lives:
Saving is one of the most common financial goals, yet it can be challenging to commit to. Your saving goals could include:
- Building an emergency fund: Accumulating “rainy day fund” money to handle unexpected expenses and financial emergencies.
- Saving for a down payment: Putting aside a substantial amount of money to purchase a home or property.
- Saving for retirement: Contributing regularly to retirement accounts like an IRA or 401(k) to ensure a secure post-work life.
When initiating a savings plan, consider following the 50/30/20 rule, which suggests allocating 20% of your monthly income toward savings.
Investing is an effective way to generate wealth over time. Setting investment goals involves putting money toward various investments based on your risk tolerance and long-term objectives. Types of financial goals related to investing could include:
- Investing in low-risk options: Allocating funds to bonds, treasury securities, or bank certificates of deposit (CDs) for stable returns.
- Diversifying investment portfolio: Spreading investments across different assets and industries to minimize risk and maximize potential returns.
- Saving for a specific milestone: Investing funds with a particular target in mind, like your child’s college fund or a future business venture.
Understanding your risk tolerance and seeking professional advice can help you make informed investment decisions.
3. Adjusting Finances for Lifestyle Changes
Life is full of transitions and major events that require adjusting your financial plans. Common financial goals associated with lifestyle changes include:
- Switching jobs: Preparing financially for a career change, which may involve periods of reduced income or increased expenses.
- Starting a business: Saving and budgeting to launch your own enterprise and navigating the initial phases of entrepreneurship.
- Preparing for a new child: Considering the financial responsibilities that come with raising a child, like healthcare and education costs.
- Retirement planning: Strategically managing your finances to ensure a smooth transition into retirement.
Each of these life events requires a period of adjustment and may require reworking your budget, reallocating funds, or adopting new financial management strategies.
4. Paying off Debt
Paying off debt is a crucial financial goal that allows you to achieve financial freedom and reduce financial stress. By eliminating outstanding debts, you can regain control over your financial situation. Some debt-related financial goals are:
- Student loan repayment: Creating a repayment plan to pay off student loan debt and free up financial resources.
- Auto loan repayment: Paying off vehicle loans to reduce monthly expenses and increase financial stability.
- Credit card debt management: Implementing strategies to minimize credit card debt and improve your credit score.
- Mortgage payoff: Working toward owning your home outright and eliminating one of the most significant financial obligations.
Paying off debt requires discipline, consistent effort, and a well-executed plan, but it can also significantly improve your long-term financial health.
As we mentioned earlier, aim for a balance in the duration and types of financial goals you focus on. Short-term goals will provide the motivation needed to stay committed to your long-term objectives—allowing you to enjoy every step on your journey toward financial success.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.