You’ll specifically use this article in Step 1 of The 9 Steps to Financial Freedom. However, it’s beneficial to review it in all steps.
Where do you want to go financially?
That’s a fairly basic question, but it seems to be one that many cannot answer.
I think I know why.
It’s tough to sit down and plan for your financial future when you’re not sure if the next mortgage payment will clear.
It’s even tougher to think about what the 60 year-old version of you will want to accomplish.
However, by not mapping out your financial goals, you’re doing yourself a disservice. That’s why setting financial goals is Step 1 of The 9 Steps to Financial Freedom. You need to know WHERE you want to go before planning how to get there.
Setting goals early can be an extreme motivator. By defining your short, medium and long-term goals, you can have something to strive for, something to achieve instead of “just saving”.
What Do You Want to Accomplish Financially?
I want you to set aside an hour on your schedule right now.
In that hour, you need to think long and hard about your current financial situation as well as what you want your future one to look like.
Now, I want you to do a brain dump.
Grab a piece of paper and just start writing anything financial that comes to your mind.
Is there something you’re angry about? Something that makes (or will make) you happy? Write it down! Continue writing until you have nothing left. You can even draw pictures if you want to!
Some of the stuff you come up with will be hard to accomplish right now. There’s nothing wrong with that. The point of this exercise is to get the goals out of your mind so you can start planning for (or thinking about) them today.
Creating SMART Financial Goals
Now that you have a piece of paper with random words on it, you’d be best served to narrow and prioritize them into goals.
You’re not going to be able to get to all of the goals right now (that’s not a bad thing!), so breaking them down into more manageable ones is best.
Use the following financial goals worksheet to define and prioritize your goals:
On the worksheet, list out the goals you’d like to accomplish.
If you want to list out all of them, that’s fine. Just realize that you may not be able to get to some of them based on your income.
When listing out your goals, make sure they are SMART goals.
More precisely, make sure they’re Specific, Measurable, Achievable, Relevant, and Time-bound.
For example, let’s say that one of your goals is to pay off credit card debt.
You could write “Pay off credit card debt” in your list of short-term goals, but that goal seems very generic and it’s hard to track.
To make it a SMART goal, try something like this:
“Pay off $600 balance on Sears card within 6 months.”
That’s a much better goal, right?
It’s specific (you named the debt), measurable (you’ll see the balance go down), achievable (assuming you have an extra $100/month to pay on it), relevant (you want to get out of debt), and time-bound (getting it done in 6 months).
Make sure all of your goals meet that criteria.
Now that you have the goals down, place the estimated amount needed for your goal (if there is one) on the worksheet.
Then, add the month and the year when the money is needed.
Using the amount needed and the month/year you need it, you’ll be able to determine how much you need to save on a monthly basis in order to meet the goal.
If you’re using the Excel worksheet, the “Monthly Savings Needed” should automatically populate on the form. If you’re using the PDF printout, you’ll need to calculate this yourself.
Ranking Your Goals
Prioritization of your goals is next. Look at each time frame and begin formulating plan of action.
For example, let’s say it’s January and your short-term goals (12 months or less) consist of the follow:
- Pay off Sears Card – $600
- Vacation – $700 in August
- Save for a “Cash Christmas” – $1,200
- New Car Tires – $300 in July
- Make a Dent in the Visa – $2,000
- Sell Comic Book Collection
You want to go through each of these items and determine which ones you want to complete before the other. Maybe you say, “a vacation would be great but I desperately need those new car tires”.
If that’s the case, the tires should be prioritized over the vacation. Does that mean that the vacation goal will not be met? Not necessarily.
When you’re creating your budget, you’ll want to design it around your goals.
Work each goal in by priority until you have no income left to spend. Hopefully they all get met. If they don’t, you just need to work harder to get the higher ranking goals taken care of so you can move on to the other ones.
Things to Remember About Your Goals
1. They’re Not Set In Stone
Your financial goals are fungible. In fact, you’ll probably find yourself altering them as you progress through the remaining steps.
You can easily allocate money from one goal to another. If one goal falls out of favor, go for the next one in line. Eliminating goals is OK. Or, completing them fast so you can move on to other ones is even better!
2. You’re Really Just Guessing
For some of your goals, you’re truly just guessing.
Will $15,000 be enough for a house down payment? Maybe. Maybe not. That all depends on what you want to buy and how large of a mortgage you want.
The numbers are not what matters. It’s the content.
3. Some Goals Will Not Be Met
I’ve been known to set high expectations in my life. Because of this, many of my goals go unmet. It’s frustrating, but I learn to live with it.
You also need to realize that some of your financial goals will go uncompleted.
Maybe you’ll run into some spending issues.
Maybe you’ll have trouble saving money a first but then learn about some ways to increase your savings and you’ll get back on track.
It’s not the end of the world.
Learn from your mistakes and move forward. There’s no point in looking back and getting down on yourself.
4. You Can Meet (and Even Exceed) Your Goals
You can do it. I know you can.
You can try and give me all these excuses in the book, but I don’t want to hear them. Suck it up.
You can even try and tell me about all of your “financial emergencies” over the past few months.
You know what? Shit happens. Deal with it and move on. Don’t dwell on the past. Refocus yourself on your goals and strive to exceed them!
* * * * *
As I mentioned throughout this article, setting financial goals is crucial to your success.
They play a role in almost every aspect of your financial life.
They’re needed for your budget.
You need to have some when you talk with a financial planner.
You also need them just for you.