Without Goals You Have Nothing to Achieve
So you’re putting part of your paycheck aside for your retirement account, making more than the minimum payment on your credit cards, and spending less than you earn so you’re doing everything you can, right? Not quite. While all of these things are good habits to get into and will help you maintain a solid financial foundation you still need to have goals before you can sit back and relax. After all, what is the point of saving if you don’t know what you’re saving for? And it’s great you’re paying down that debt but do you have any idea when you should have it paid off, and even if you do, how do you know if that’s good or bad?
This is where setting goals come into play. Without financial goals you may be doing all the right things yet still have no idea what you’re trying to accomplish. When you aren’t following a specific action plan and trying to reach finite goals you often end up floating aimlessly over the years just doing the status quo. It’s still better than doing nothing at all, but many studies have been done over the years that show those who take the time to define clear goals are far more likely to succeed in reaching them. So, stop telling yourself l that you just want to pay down your debt, or put money away for retirement, or try to make a little more money at your job. Those are all things you want to accomplish but you need to put some specifics behind them.
What is a Financial Goal and How Are They Different from Dreams?
A financial goal is something you intend to achieve. A financial dream is something you hope to achieve. This doesn’t mean that your financial dreams can’t come true, but usually your dreams are a little more lofty and not all that likely. Dreams start with “I wish” and goals start with “I will.” You achieve your goals by setting a specific deadline, dollar amount, or task and t hen create a plan that you can follow to completion.
Consider these two individuals:
- wants to get out of debt
- would like to buy a house
- is thinking about retirement
- hopes to be able to send his son to college
- will be out of debt in five years
- will have a down payment set aside to buy a house in two years
- is putting 10% of his paycheck into his 401(k)
- has established a 529 plan and is saving $250/month
I probably don’t have to point it out to you, but is John or Mark the dreamer and who is more likely to actually reach their goals? Exactly, Mark has defined a very clear vision of what he wants to accomplish and how he can get there. If I had to guess, even if their financial situations and goals were identical Mark would be far more likely to reach his goals before John. It’s much easier to take action if you know exactly what you want and how long you have to get there.
How Your Values Determine Your Goals
Your core values and fundamental beliefs about what’s important to you will provide the basis for your goals. This is why no two people have exactly the same goals. Sure, everyone wants to save money and build wealth, but how much, how fast, and for what reasons will be different from person to person. Others will value being debt-free over an early retirement. Some will want to focus on buying a home and starting a family instead of traveling and so on.
Take a minute to think about what is important to you before blurting out specific goals and put them down on a scrap piece of paper. Throw out words or ideas that you value as a quick brainstorm. For instance, if I quickly put down a few things that I value and feel are important I come up with: family, education, independence, golf, entertaining, good food. These are the things that make me happy and now that I’ve brought them out and started to think about them I can then begin to start putting down some concrete goals that reflect these values and ultimately help me achieve them. On their own they are far too broad of ideas to actually be goals themselves, so that’s why it’s important to take the next step.
Putting Together Your Financial Goals
Setting goals is a process and each one requires a few key pieces of information in order to be effective. The steps in creating your financial goals are:
- Identify the goal.
- Set a deadline for achieving the goal and be as specific as possible.
- Estimate the cost of the goal, either in terms of time and/or money.
- Break down the total cost into monthly amounts required.
- Identify the specific actions or tasks you’ll take to reach the goal.
- Track your progress.
Using a Goal Worksheet
One of the easiest ways to start developing your goals is to use a financial goal worksheet. This sheet highlights all of the important information required for each goal and allows you to get a nice visual picture of what you want to accomplish and how to go about it. Let’s start with a sample goal.
As you can see, the first part of our goal process is fairly specific. We want to create an emergency fund within 18 months. Now that we know what we want to accomplish and in what time frame, it’s time to put a dollar amount on this goal.
So, you’ve determined that you need to put $10,000 into an emergency fund in 18 months. So far we have a specific goal, how much it is going to cost, and how long we have to accomplish it. So, that allows us to calculate what it will take each month to make that a reality. Some basic math tells us that in order to save $10,000 in 18 months we’d need to put aside $556 each month. Now that we have a specific and realistic number to work with it’s time to outline how we can accomplish that.
This is where you get to go into detail and outline how you’re going to come up with the monthly commitment. For example, maybe you will cut back on a few meals out each month, drop the expensive premium movie channels, and open up a high-yield online savings account. Those were just some quick action examples and your action plan will be different depending on your situation. You can make this as detailed as you want, but the more specific actions you list the more likely you’ll be able to follow through and reach that monthly commitment, and ultimately your goal.
If you’d like to get started I have provided a copy of the financial goals worksheet for you to download.
Prioritizing Your Goals
Most of you will have multiple financial goals but limited resources. This often means you can’t fully fund every single goal all at the same time. That’s ok! Don’t get discouraged and take some time to prioritize your goals so you are putting your time and money to work in the most efficient manner possible. Once you have your goal worksheet filled out you may want to label each one as either a long-term or short-term goal. I usually like to think of long-term as anything beyond five years.
Once you’ve broken down your goals into long and short-term you can start to prioritize. Usually it’s best to take a hard look at your short-term goals first. That’s because shorter term goals tend to deal with more pressing financial concerns such as getting out of debt, building an emergency fund, or taking care of something that is somewhat urgent. As you can probably guess, it wouldn’t make much sense to fully fund your retirement account if another goal is to create an emergency fund and you don’t have a penny in savings. So, focus on your short-term goals first and put most of your effort into those that are most important.
Then you should begin looking at your long-term goals. Now, this doesn’t mean you should put your long-term goals on the back burner while you tackle all of your short-term goals first. Not at all. Instead you should just be putting a little extra money or time into your short-term goals while cutting back on your long-term goals for the time being. Remember, even if one of your goals may be something 30 years down the road you still want to maximize all of the time you have. So while you may not be fully funding that goal while you’re focusing on paying off your credit card debt in the next two years it might not be a good idea to abandon that long-term goal completely. There is opportunity cost associated with all of your goals so it’s up to you to prioritize what’s more important to you and make sure you’re maximizing your efforts.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.