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What Are Financial Goals?
Perhaps you are either one of those who start out your year with ‘New year resolutions’ or know people who do. Those are goals people set to accomplish for the rest of the year. Serious people don’t just write resolutions, they develop plans, and work hard to accomplish them. In the same way, financial goals are personal financial objectives one sets for how one will make, save and spend money. Identifying and writing out goals helps to keep one focused to achieve them.
Types of Financial Goals
There are Three major types of financial goals:
- Short-term goals: These are smaller financial targets that can be reached within a year. Such goals, as buying a new furniture, electronic gadgets, taking a vacation, etc., fall into this category.
- Mid-term goals: These are more expensive financial targets that may take a little longer (up to Five years) to achieve. Saving for a down payment for a new home, major home improvement, and paying off a school loan fall into this category.
- Long-term goals: These are those financial targets that require more money and may take longer time, sometimes up to five years, to accomplish. Such financial targets, as saving for children’s school fees, saving for one’s retirement fall into this category. They require greater financial planning and discipline. Usually, they involve saving and investing money over a period.
Why Is Setting Financial Goals Important?
Not having a financial goal is like flying a plane without a rudder or driving a car without a steering; you may end up, where you don’t expect. Having a financial goal changes how one sees and spends money. One can see how every dollar wasted sets one back from achieving financial freedom. Therefore, one will become more prudent and accountable with money.
Take for instance, you usually spend $5 every day on pay-per-view movies because you feel that $5 is too small to make a dent on your salary. You eventually set a goal to get a new laptop and start saving the $5 each day. In a week you save $35, in a month it comes to $140. In 3 months, you already have $420 to get yourself a laptop. Setting a financial goal helps you stay focused and disciplined with your finances.
Steps to Setting Financial Goals
- Determine What Needs to Be Accomplished and Write Them Down: Don’t develop a ‘laundry list’ of your dreams and fantasies. Determine either what matters most to you or what can lead you to financial freedom. Writing them down and perhaps posting it, where you can see it every day will serve as a daily reminder. Most people post goals list next to their beds, where it can be seen daily.
- Make it SMART: This means making your goal unambiguous. It should be SMART – Specific, Measurable, Achievable, Relevant, and Timely. Don’t just say “I want a large sum of money before Thanksgiving”, rather say “I will save $500 in 5 months’ time to buy a laptop.
- Sort Your Goals into Realistic Categories. Group them into short-term, mid-term, long-term based on the definitions we gave above.
- Create a Realistic Budget: Have a very clear picture of how much you make in a month, how much you spend and figure out where the money to fund your goal will come from. Write this out; it is called your ‘monthly budget’ and stick to it.
- Set Milestones and Deadlines: Attach time frames to your goals and monitor your progress. Make sure that you are hitting certain benchmarks. If not, re-evaluate what you are doing wrong.
Having a Financial Finish Line.
In field and track events, a ‘Finish Line’ is that line that marks the end of a race. Having a financial finish line involves setting limits on one’s salary in the area of your spending, savings, and investment. There are two types of financial finish lines. The ‘Spending Finish Line’ sets your annual spending limit, while the ‘Wealth Finish Line’ sets the amount you need to accumulate to either provide for the basics through retirement or provide financial independence and security. Setting these limits helps one to know what to do with the excesses if any. Usually, an excess on spending finish line goes towards savings, while an excess on wealth finish line goes towards charity or luxury living. When one dies, a big bank account balance won’t be the legacy to leave behind. One will be most proud of what one achieved with the money entrusted into one’s hands during one’s lifetime. Financial finish lines will, therefore, guide one to find the balance between saving and generosity. Every race should have a target, that target is the Finish Line.