Before setting financial goals, clarify your values and create a vision for your life. Taking this necessary step will help improve how you manage money.
What is a vision for life? A vision is about your future and how you want to live your life. A vision is a big picture that your financial goals are meant to create. For example: how does the house, the car, or the clothes create that future you dreamed of? Does it make you feel a certain way? And are these things supporting the future you’ve envisioned?
It’s important to get some clarity about the life you want to live before setting financial goals. Often, we set goals that others deem important and have nothing to do with what we actually want out of life. Therefore, we find it more challenging to achieve those goals.
In this article, we’ll walk you through the process of setting financial goals.
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What are Financial Goals?
Financial goals are specific, monetarily quantifiable, and measurable aspects of the vision for your life. They are things that can be purchased such as goods, education, and experiences. These goals help you achieve your vision.
The best financial goals align with your values and objectives. They are not ambiguous such as pay off debt, but rather very specific such as pay off student loan debt in 5 years.
As with any goal, these financial goals should help you move forward with your long-term plans. If a vision of your life includes more control over your time, through financial independence, then your financial goals should align with your vision.
What Types of Financial Goals Exist?
Financial goals can be categorized. You can create short-, mid-, and long-term financial goals.
Short-term goals are used for smaller and more immediate needs and wants. For example, your goal to save $2000 for a cross-country road trip.
Mid-term goals require a bit more time and something you may want to achieve in 3-5 years. This may be saving up for a car downpayment.
Long-term goals are often related to retirement. For instance, investing enough to ensure you can retire well in your 60s.
Not only do financial goals fit into a time-base category they also are different types.
Different Types of Financial Goals
- Have a rainy day fund
- Pay off student loans
- Save for college expenses
- Improve credit score to excellent
Examples of Specific Financial Goals
- $1,000 in an Emergency Fund
- $10,000 for a home down payment.
- Payoff $5,000 in credit card debt in 2 years.
- A 7-day cruise costing $1500.
How to Set Financial Goals
You can set financial goals can using the SMART system. SMART goals are defined by the following characteristics:
For example, if your goal is to pay off student loans in 5 years, then you have a financial goal that is measurable and trackable.
Create a Budget for Your Financial Goals
We often think of budgets as a financial goal. Sure, it may be a feat to create and stick to a budget. However, budgets are meant to help you allocate your resources to achieve your goals.
During the budgeting process, you often uncover some financial goals. Your financial goals are a component of your financial plan and budgets are the framework to help you achieve them.
For instance, through the process, you become aware of the total amount of monthly credit card payments and total debt. This awareness pushes you to set a financial goal of repaying those credit cards off within a year.
When you connect your budgets to your financial goals, you’re able to clearly see what’s important to you. And the budget can help you track your progress.
Your Goals and Life’s Vision
The reason you need to be clear about your long-term vision and values is to help you create a sense of urgency in achieving it. Not fully understanding why paying off student debt creates your ideal life, can extend achieving that goal further in time.
For example, your vision for your life is traveling the world and gaining new life experiences as you eat different food, learn new cultures, and share your stories. However, you’re planning on getting a mortgage. In this example, your financial goals should be related to saving money for travel, not a mortgage that may lock more of your hours to work than travel.
Or if you’re vision includes living in New York City, then saving money for a car may not align with the lifestyle you vision.
When you’re clear about your vision, you’re able to set financial goals that align with what matters most to you. You’re then able to move towards that vision.
Why Financial Goals Matter
Having very clear financial goals helps you make better-informed decisions. When you know what you’re working towards and why you’re doing the work, you’ll come to discover goals are being reached.
For example, let’s say your goal is to pay off your car loan. Doing so can improve your cash flow in the long term. In order to achieve your goal, you’ll need to lower monthly expenses in other areas to allocate more money into paying off the car.
If you hadn’t identified the goal, you may continue spending as you normally would.
What are your financial goals? What challenges do you face trying to achieve them? Do you have a vision for your life?