Stop what you’re doing and think about what you’re working toward right now. What kind of aspirations do you have for your life? When you’re making life plans, it can be hard to connect your ambitions back to your finances. Enter: Setting financial goals.
Why set financial goals?
Creating financial goals can be the difference between your hopes and dreams … and your reality.
Just like setting life goals or business goals, setting financial goals is the key to realizing their success. When you set realistic, achievable financial goals, you lay the foundation for making those goals happen – in the way you want them to happen.
Financial goals definition
Your financial goals are going to be unique to you, but they all have a few key elements.
Every financial goal will have a start date, an estimated end date, an estimated amount (if you’re saving or investing), and a reason for setting that financial goal. Successful goals will also include a clear plan of attack – what you’ll do in your daily life to reach them.
How long do financial goals take?
Financial goals can be set for as short as one or two months, or longer than 30 years. The length of your financial goals will depend on what you want to achieve and a realistic estimate of how long it’s going to take you to achieve them.
Common short-term financial goals include:
- Saving money for a few months for a short vacation
- Creating a budget
- Starting an investment account
Goals for your long-term finances can include:
- Paying off student loan and auto loan debt
- Saving for an emergency fund
- Developing a retirement plan
Everyone should have a mix of short-term and long-term goals, but it ultimately depends on what stage of life you’re in and what you want to achieve.
Learn more about your finances and plan your next steps with Best Egg Financial Health.
Examples of financial goals
There are a few common types of financial goals that you’ll likely set at some point.
Before you set financial goals of your own, here are four of the major types of financial goals to set:
- Saving – Saving money is one of the most common financial goals, but one of the hardest to commit to. You could decide to save for an emergency fund, a vacation, a large down payment on a home, a college fund, or your retirement. When starting a savings plan, consider following the 50/30/20 rule, which sets aside 20% of your monthly income toward savings, 50% for necessary living expenses, and 30% for discretionary spending.
- Investing – Investing is the most popular way to make money work for you. Setting investment goals means giving up money for now but getting a return later in life. Let the wonders of compound interest work in your favor! How you invest will depend on your risk tolerance, but many people opt to invest in low-risk options like corporate bonds, Treasuries (which include Treasury bonds) or bank CDs.
- Readjusting finances for a lifestyle change – Major life events happen, and a common financial goal is to simply prepare for those milestones. Your emergency fund is part of that. Lifestyle changes that can require some time to readjust include switching jobs, starting a business, having a child, and retiring. Each of these life events has a period of transition when you’re figuring out how to make it work. You may have to rework your budget, move money to different accounts, or change the way you manage your money.
- Paying off debt – When you set a financial goal to pay off debt, you’re figuring out a way to pay off every debt you have. Things like student loans, auto loans, credit card debt, and yes, your mortgage too, could all be paid off when you systematically plan to make it happen. The ultimate goal is to be debt free.
How to set financial goals of your own
Now that you know what others have set as their financial goals, it’s time to start laying the groundwork for yourself. There are three components to setting up financial goals. You’ll need to understand:
- What your financial situation looks like today
- What you want your financial situation to look like
- How you’re going to get there
Step 1: Understand what your finances look like now
Before you set your goals, it’s important to understand where your personal finances are. Get a pen and paper or open a spreadsheet and list all your assets and liabilities. Your assets will include anything you own and any savings or investments you have. Note the interest rate you are getting for savings and investments. Your liabilities will include anything you owe money on, such as a mortgage or student loans. Again, note the interest rates on those.
Then, evaluate your budget. How much money is coming in? How much is going out? Is your checking account always in danger of hitting bottom? Are you meeting your current budget limits and savings goals?
By the way, few people feel great about themselves after they’ve looked at their expenses and budget. We promise: Understanding your financial situation might be the most painful part of the process of setting financial goals.
Step 2: Figure out what you want your financial situation to look like
This is the part where you get to dream a little. The second step in setting financial goals is to figure out what you want your goals to be. What do you want to have or be able to do, now, and in the future?
Take the time to write down what you want to achieve. Talk to your partner and family. Ask the people in your life who are doing the things you want to do. This is the time to get inspired and excited about what the future holds for you.
Ask yourself questions like:
- What kind of lifestyle do I want to have when I retire, and how much will it cost a year?
- Do I want to buy a home with my partner, or keep renting?
- At a minimum, how much money will I need to start my business?
- When I vacation to Italy, will I want to keep it inexpensive, or will I want something more lavish?
- If I lose my job tomorrow, how much money will I need in order to stay afloat for three months?
Step 3: Determine how you‘re going to make your financial goals your reality
Back down to Earth. The final step in setting financial goals is figuring out how you’re going to get there.
First, prioritize what you really want to accomplish. You should be working toward several financial goals at once, but make sure what is most important to you is at the top of your list.
Then, pick your other top priorities and lay out what you need to do to achieve them. Once you know how you’re going to do it, make the plan to adjust your current finances to fit. When you have a clear set of goals, it helps you make better financial decisions.
You’ll likely have to wrestle and re-prioritize in this step. It’s important to stay realistic, but do not get discouraged. If something is truly important, you’ll find a way to make it work.
Financial planners can assist you in making your financial goals concrete and achievable. They can be especially helpful for complex or long-term financial goals like managing a business and saving for retirement — but they are not required.
Stay on track to watch your goals come to life
Once you set your financial goals and have a clear idea of how you’re going to achieve them, you’re on your way!
Here are a few tips that could help you be successful in bringing your financial planning to life:
Automate + simplify – Figure out ways to simplify even the smallest tasks. Ask your employer if they have savings or investment options that can pull directly out of your paycheck. Add formulas to your financial spreadsheets. Try services and smartphone apps that automatically take money out of your account and put them into savings accounts.
Tell others about your goals – Having people interested in your progress can help you stay motivated to make that progress. Consider telling members of your family, trusted coworkers or your social media followers. The people in your life want to see you succeed, and they will want to know how you’re doing.
Continue to create short-term financial goals – Small milestones make a big impact. Achieving short-term goals allows you to see the rewards of your work in your day-to-day life. You may want to always be saving for a weekend getaway or gifts for loved ones. For future goals like saving for retirement, set savings goals for every year. That gives you a victory every year instead of one big win at the end.
Remember that you set these goals. You can change them, too – While we don’t recommend changing or readjusting your goals often, it’s important to remember that it’s OK when plans change. Emergencies happen and priorities change, but you have the ability to adapt. When something derails your financial goals, take the time to adjust. Then, put your foot back on the gas and move forward.
Ready? Set … Go.
Setting up financial goals requires some work up front, but actually achieving your goals will be worth it. When you set your financial goals in motion, you’re setting yourself up to achieve success and live the life you truly want. Now, go make it happen.