Have you ever wanted to buy a car? Put a down payment on a house? Dreamt of retiring with your spouse to someplace warm and sunny? We all have! But there’s a difference between those who just wish for these nice things to happen and those who actually make them come true.
Turning dreams such as these into reality involves something called “financial goal setting”. In this post, we’re going to share what that is and how it can be an effective way to help you accomplish your objectives as well as put you on the path for a secure financial future. After you have set financial goals, it’s helpful to know more about organizing financial paperwork so that you can stay on track with your goals.
What is Financial Goal Setting?
Financial goal setting is the process of determining what you want to accomplish with your money and then setting your financial priorities to get there. To put it simply, it’s how you establish your money goals. For instance, if you’ve decided that buying a vacation home or saving up for your children’s college were specific goals that you’d like to achieve, then these could be considered examples of financial goal setting.
Keep in mind that these goals may not always be the same throughout your lifetime. As you mature and reach the previous goals you were pursuing, your financial situation may change and bring about new priorities that you’d like to strive for. Keep in mind that you can review your old records to help inform your financial plan. If you’re wanting to consolidate and clean up, learn how long to keep financial records.
Why Is It Important to Set Financial Goals?
Getting in the habit of setting realistic financial goals is something we can all benefit from. Whether it’s improving your current financial situation, building up your net worth, or reducing your level of financial stress, goal setting is going to help you achieve it.
When you take the time to truly consider what’s important to you and how you want to use your money to help you achieve it, this process accomplishes the following:
- It helps you to digest the reality of your current financial situation and motivates you to take responsibility for your financial future.
- It helps you think beyond the wants and needs of today and better prioritize what you should be doing with your money
- It gives you the basis to measure your progress so that you can see how you're doing and where you can make improvements
For instance, building up your retirement savings is generally a good financial goal for most people because it ensures that they will have all the means they’ll need to support themselves in the future. But by setting this goal early on, it also allows them to harness the power of compound interest which will help them to achieve financial freedom sooner than they think.
What Are the Three Different Types of Financial Goals?
Short Term Financial Goal
Your short-term financial goals are the things that you would like to accomplish within the next 3 years. The idea is to make an impact on your immediate financial situation as quickly as possible. These are generally such topics as:
- Starting a budget
- Paying off high-interest debt
- Getting a raise or promotion
- Building up your savings account or emergency fund
- Reducing your living expenses
- Financing a vehicle
- Buying an engagement ring
- Improving your credit score
- Going on a vacation
Mid Term Financial Goal
With mid-term financial goals, your time-frame may increase to the 3-to-10-year range. These goals might be a little loftier than your short-term goals, and they will probably take a little more effort to achieve.
Some good mid-term goals might be:
- Paying off a major credit card or student loan debt
- Paying for a vehicle without financing
- Saving up for a down payment on a mortgage
- Saving up for a wedding
- Planning your career path for a higher income potential
Long Term Financial Goal
Your long-term financial goals are those that you’d like to achieve in 10 or more years. These are usually major milestones that may only happen once or a handful of times in your lifetime.
Some common long-term goals might be:
- Increasing your overall net worth
- Contributing more money into your retirement accounts (401k, IRA)
- Paying off your mortgage
- Buying a second home or vacation property
- Starting a business
- Leaving a legacy to your family or heirs
What is An Example of a SMART Financial Goal?
No matter if your goals are short term or long term, it can be helpful to have support. Learn the difference between a CPA vs financial planner to know what is right for you. As you’re deciding what your financial goals should be, don’t make them too vague. Instead, productivity experts recommend that you make what’s known as SMART goals.
SMART stands for:
By making your goals SMART, you’ll have a much greater likelihood of actually achieving them. For instance, try the following:
- Instead of saying “I want to buy a house”, say “I will save up $30,000 by the end of this year to use as a 20% downpayment on a new house”.
- Instead of saying “I want to get out of debt”, say “I will pay off $50,000 in 5 years and become debt-free”.
Notice the difference? By setting SMART goals, they go from being abstract desires to something more tangible. This lets you begin to visualize how you will achieve them, layout your plan, and then track your progress as you work towards making it happen.
How You Can Start Preparing Your Financial Goals Today
Start by thinking about what’s important to you. Ask yourself: What do I want to accomplish financially in the short-term, mid-term, and long-term? Take into consideration your financial history and how it will impact your financial goals. If your finances are in flux right now, it can help to know answers to specific financial questions like what happens when you file bankruptcy or what your current financial state should be before you set a long term financial goal. If you’re in a relationship, be sure to also include your partner in the conversation as your shared vision of these goals will impact how you’ll go about accomplishing them together.
Next, start putting together an accurate picture of what your financial situation looks like now. The best way you can do this is by knowing how to organize bills and the rest of your financial paperwork in general. An app like Pillar can help accomplish this step.
With your paperwork available, start using the information they contain so that you’ll have specific values to work with. Remember, your goals should be SMART. So before you can confidently say “I want to retire by age 55 with $1 million”, you need to know where your net worth currently stands to know if a plan is realistic.
Finally, once you’ve established your financial goals, don’t give up on them. As you work towards accomplishing each one, you’ll surely run into issues and challenges along the way. But as long as you stay resilient and don’t take no for an answer, you’ll eventually find a way to resolve each one and make your financial dreams a reality.