By Kelly Hodges
Imagine getting in your car and starting to drive, with no particular destination in mind. How do you know if you are going in the right direction? How do you know when you’ve arrived? It makes no sense to travel not knowing where you’re headed- without a target to arrive at or a map of how to get there. The same holds true for our personal financial situation. We need clearly defined financial goals so we can focus our efforts on achieving them, instead of aimlessly wandering without a roadmap for our financial future.
Although everyone has financial goals, not everyone goes about setting them correctly, and there is actually a right and wrong way to do this. Below are a few steps to make sure that you’re optimally defining your goals, so you can then work on the equally important task of achieving them.
1. Make your goals as specific as possible. The more detailed you are in defining your goals the easier it will be to create a plan to achieve them. For example, setting a goal of “paying for college” is not particularly helpful. There are so many variables that factor into college tuition that it’s impossible to project the funds necessary from this vague statement. In contrast, the goal of “covering 100% of tuition (but not room and board) at a state school for four years” is much more helpful. This specific goal allows you to calculate the funds needed. If tuition is $10,000 per year today and projected to be $15,000 in 7 years when your child will be a freshman, then you know you will need to allocate at least $60,000 to achieve this goal. The more detailed and specific you can be when setting your goals, the more accurate you can be in estimating the funds needed to achieve them.
2. Break each goal down into pieces. Once you have your list of specific goals, dissect each one apart to see what needs to be done to accomplish them. If your goal is to buy a $200K house in two years and you need $40K for the down payment, then you need to save $1600 per month towards this goal. Is this realistic? Once you see the numbers broken down you can determine if this goal is achievable in this timeline, and if not make the necessary adjustments- like buying a cheaper house, waiting an extra year to make the purchase, or bringing in some extra income.
3. Prioritize each goal. If you have multiple goals that are loftier than your current income, you likely won’t have the funds to fully bank role each one. This means you will have to prioritize which goals are the most important to you and determine how to allocate your resources to best achieve them. You may decide that retiring at age 60 is more important than the vacation home in Aruba, and choose to max out your IRA instead of buying scuba gear. Goals and priorities are constantly changing, so it’s important to revisit these goals on a regular basis to make sure they are current. Maybe in a few years you’ll decide you really like your job and wouldn’t mind working until 65, and then shift gears to saving for Aruba. It’s your goals and you can make them whatever you want them to be.
4. Treat your goals as a bill. When you’ve prioritized which goals are most important to you and determined what it will take to achieve those goals, incorporate them into your budget and treat them as you would any other bill. Make “payments” each month towards your goal just as you would for your mortgage or electric bill. This will prevent Junior’s college fund from being blown on something frivolous.
Setting goals is one of the critical fundamentals needed to ensure a solid personal financial situation. Stay tuned for the next posts in the series on paying yourself first and using a budget.
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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of her employer or any other person or entity.
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