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What Is a Financial Goal?
When you set financial goals, you are setting out your financial priorities and targets to create your desired lifestyle. When creating your financial goals, you should consider what your priorities are and list them in order. These priorities will be unique to you.
For example, you may want to travel the world. You wish to experience different countries and cultures, without the constraint of work. You’ll need to create wealth to have the financial freedom to do so.
Perhaps you want to be free of debt. Or earn a college degree. Maybe you want to buy a new home or relocate to Nassau to work. Perhaps you want to do all of this. You’ll need to set your financial goals needed to accomplish these aims, and then you will need to prioritize those goals.
Why Do You Need Financial Goals?
Success doesn’t simply happen. People reach the pinnacle of their potential because they set themselves goals and then plan to make their dreams come true – and act in accordance with the plan.
In all walks of life, the successful people are goal-setters:
- Athletes spend hours each day training to become Olympic gold medal winners
- Entrepreneurs learn new skills to help them create and develop new businesses
- Amateur mountaineers prepare for months to reach the summit of their next challenge
In each case, the goal is set first. The gold medal, the new business, the next summit – they are all goals. Without setting these, the athlete, the entrepreneur and the amateur mountaineer would not be able to plan and prepare. They wouldn’t reach their goal.
Let’s look at why you need financial goals in a little more detail.
You Must Know Where You Are Going
When was the last time you sat behind the steering wheel of your car, started up, and just drove? My bet is that the answer would be never.
Tolkien’s Gandalf may have famously written “Not all those who wander are lost”, but, quite frankly, that’s hogwash. Without a planned destination, you may not be lost, but you certainly aren’t going anywhere meaningful anytime soon.
Financial goals provide a destination. They give you a target, and this helps stop your finances wandering aimlessly. Only when you know where you want to be can you plan the journey that will get you there.
You Must Know How Much You Need to Save
Identifying your financial goals will help you prioritize your finances. You’ll also have a clear idea of how much you need to save. Let’s introduce you to Joe and Peter – brothers, but with very different desires.
Joe yearns to spend a year traveling the world. His main goal is to experience different cultures, breath in global history, taste different foods, and learn a different language. Joe needs to consider what his living costs will be while traveling, as well as the costs of getting to and from where he wishes to visit.
Peter is a family man. He and his wife own a home with a mortgage. His main goals are to become debt free and invest in college funds for their two daughters. Peter must assess his debts and calculate how much money they will need to send their children to college.
When you have created your financial goals – and you might have several – you can assign a savings amount to each, and then prioritize them. These goals will dictate how much you need to save, and this is used when budgeting and planning to achieve your goals – and applying the mindset needed to ensure they become a reality.
Financial Goals Help Shape Money-Making Choices
What if your financial goal needs more income to achieve? This could lead you to search for ways to make more money. You might sell unwanted items, search for a second job, take on more hours or responsibility at work, or create a side hustle.
Financial goals, budgeting, and your money-making choices work hand in hand.
Financial Goals Help You Stay Focused
It’s easy to lose focus on a journey. The longer the journey, the easier it is to veer off-course. A financial goal helps you stay focused on the prize.
A set of financial goals helps you stay focused on the big picture. Financial goals also force accountability. The target acts as a motivator to stick to the financial plan, and with the right mindset and effective budgeting there is no reason not to succeed.
Financial Goals Are Critical to Realistic Plans
Your financial goals will enable you to create realistic plans to achieve them. You might use similar techniques to achieve many of your financial goals, but tailor them to each specific goal and your ability to use them.
For example, as we saw earlier in this article, Joe and Peter’s goals are very different. However, to achieve them they may both seek to reduce their current expenses and earn more with a side hustle or by taking a part-time job.
The strategies that you choose to achieve your financial goals will depend on many factors, such as:
- Access to the internet
- How much time you have available
- Your current bills and expenses
- Your family situation
- Your health
This isn’t an exhaustive list. There are limitless ways in which you can make money and save money.
Types of Financial Goals
Your financial goals will generally fall into one of three types: long-term, medium-term, and short-term. Your plan to achieve each goal will depend upon which type of goal it is. Put another way, the strategies you use will be determined not only on the factors we’ve mentioned above, but also how much money you need to save to achieve the goal and when you need the money for that goal.
Long-Term Financial Goals
Long-term financial goals may include retirement plans and estate planning.
Saving for retirement is likely to require planning for 20 or 30 years or longer. You may have access to financial products such as a 401(k) through your employer or an individual retirement account (IRA).
Generally, you’ll be able to take a bigger risk to make a bigger gain in the early years because you have time to recoup any losses. As you near retirement, you may decide to reduce the risk to cement the return in your retirement years.
You should also consider the costs of any investment plan you put into action, as higher costs diminish returns – a difference of just 1% on your return could make a huge difference to the outcome at retirement.
Medium-Term Financial Goals
Medium-term financial goals are those which fall in the five- to 10-year or 15-year bracket. Such goals might include saving for your kids’ education, a down payment on a house, or a special vacation to celebrate a special occasion (e.g. silver wedding anniversary).
The financial products that you choose to achieve these goals might include investments such as ETFs, or safer instruments like certificates of deposit (CDs). It’s important that you understand how the products you choose are charged, and that you invest not only in line with your appetite for risk, but also your tax situation.
As a start, you can try a software that is good for beginners and requires only a small amount of money. Betterment is a robo-advisor that automatically invests your money for you without having to monitor it often.
Short-Term Financial Goals
Usually, short-term financial goals are those that you wish to achieve in one or two years, though they may also cover goals up to five years out.
These are goals which may require you to have immediate access to your money (such as saving or replenishing an emergency fund), or where money is needed at a specific time soon (such as saving for a vacation).
As you can see, the time horizon plays a critical role in your financial goals and financial planning. Generally, the longer-term the goal the more risk you can take to obtain a higher return. There are many different financial products and other strategies that you can employ to achieve short-term, medium-term and long-term goals. Let’s look at a few.
Examples of Financial Goals
A good overarching strategy to consider is that your short-term goals should feed your medium-term and long-term goals, while your medium-term goals may also feed your long-term goals.
For example, achieving a short-term goal of eliminating your debt may give you an extra $800 per month of truly disposable income. You may decide to save half of this toward a down payment on a house (a medium-term goal). You may then choose to invest the other half into an IRA (a long-term goal).
Here are a few typical financial goals.
Pay off Your Debt
A short-term goal, and generally one that will make you better off financially.
No debt – how would that feel? You won’t need to struggle to find the monthly payments, and you won’t be lining someone else’s pocket with interest payments. The money you no longer pay on debt can be used to invest for your future financial freedom.
Save an Emergency Fund
A short- to medium-term financial goal, though maintaining your emergency fund is a long-term goal of good money management.
An emergency fund is one of the most important financial tools you can own.
With an emergency fund in place, you won’t need to borrow money if your car breaks down or your heating system needs a repair. You won’t have to rely on expensive credit card debt to see you through to the next paycheck. It ensures that if a financial emergency hits, you don’t have to worry about where your next meal will come from.
Save a College Fund for Your Kids
Saving for your kids’ education is usually a medium-term financial goal.
What could be better than to give your kids a great start in life? An amazing education with no debt? Now that’s a feeling that is hard to replace, and your efforts will make sure that your kids start their life after college on a firm, independent footing.
Save for a Down Payment on a Home
A short- to medium-term goal.
For most people, a home is the ultimate investment. When you own your own home and you become mortgage free, you won’t have rent to pay. You’ll have an asset that should appreciate in value over the long term. And you’ll have the security of knowing your landlord won’t move you on when he wants to. It all starts with a down payment.
Pay off your Auto Loan
Again, a short- to medium-term financial goal.
According to the statistics, car loans generally come with an interest rate of between around 5% and 7.75%, though independently used car rates average around 11.5%. That’s expensive money, and a loan that you would probably want to repay as fast as possible. When you pay off your auto loan, you’ll have a lot more to put toward your other goals.
Save for a Vacation
This is usually a short-term goal, perhaps for a family vacation in 12 or 24 months. However, you may, like Joe, be saving for a year or more away, or for a big vacation to celebrate a special occasion, in which case this goal may become medium-term. Vacations create some of the best and longest-lasting memories.
Saving for Retirement
Another long-term financial goal.
You should assess how much you would need to live on when you retire, and then decide how big your retirement pot needs to be to achieve this income level. This requires you to carefully consider the retirement lifestyle you desire. Will you be happy sitting at home reading, or do you want to take a world cruise every year?
The sooner you start saving toward your retirement, the less you will need to save each month and the wealthier your retirement will be.
SMART Goals Bring Success
It really isn’t enough to say, “I want to create enough wealth to be financially free.” What is enough wealth? When do you want to be financially free? Will your financial target be attainable? Creating SMART goals will help you achieve your financial freedom.
SMART is an acronym for:
- Specific – “Invest more money” doesn’t cut it. “Invest $100 each month” does.
- Measurable – your goal should be measurable, and you should be able to track it.
- Attainable – sometimes called actionable, this asks if you can achieve the goal. An unattainable goal will demotivate you.
- Realistic – and relevant. The goal should be worthwhile, achievable, and within your ability. Making more money by becoming a part-time heart surgeon is probably not realistic, but making extra money by selling used appliances for cash near you is.
- Time-bound – the goal must have a deadline. This should give you enough time to achieve your goal, but not so much that it weakens it.
The first goals you should set are your life goals. Then you can consider the financial goals you need to hit to attain your life goals. This will help you set budgets, save and invest appropriately, and manage your money effectively.
The ultimate goal is to improve your finances to become financially independent – not dependent on work to provide the income to pay your expenses and give you the lifestyle you desire. This might include doing a job you love without being reliant on the paycheck and helping others in your community.