It may be a cliché, but the oft-repeated proverb – he who fails to plan plans to fail -faithfully captures the essence of planning in all human endeavors. Be it a night out for the movies or a vacation or your retirement, planning is key to achieving whatever it is you set out to do.
Without planning your finances, you are more likely to flounder and fail as you drown in a pile of debt, no matter how much money you make or earn.
To get your financial plan up and running, it’s super important you set goals. Goal- setting is at the core of every executable plan. Without a well-articulated financial goal, you won’t make much progress financially.
How to Set Goals
Goal setting is a science. Before we get into the details, it’s necessary we understand the science of goal setting. Over the last 50 years, there’s been a considerable body of research into the science of setting and achieving set goals. One of the foremost experts in goal-setting theory, Dr. Edwin Locke, a respected psychologist has outlined the principles behind effective goal settings. These include:
- Specificity: What exactly do you want to achieve? Spelling out your goals in clear, specific terms makes it much easier to meet it. A fuzzy target will only confuse the marksman.
- Challenge: How challenging are your goals? Goals that are tough but realistic brings forth the best efforts from you. If the goal is too easy or virtually impossible, you’re less likely to achieve it.
- Commitment: What is your “why”? Your reason for trying to achieve an objective is linked to your level of commitment. The more the goal is important to you, the more committed you are to it.
- Feedback: You can only achieve your goal when you track and monitor your progress towards it.
How to Set Money Goals
Building on the above principles, researchers developed the S.M.A.R.T. goal-setting system which suggests five elements that must be built into your goals for effectiveness:
The S.M.A.R.T. framework will help you to define your financial goals.
Firstly, you have to find out what you want to achieve with your money. Write the answers down to help you clarify your thoughts. Thinking clearly over this will let the importance of money in your life sink in and help you commit further to your goals.
You must gain control over your money or the lack of it will forever control you. —Dave Ramsey
Sorting and Prioritizing Financial Goals
When you have decided on the money goals you have to achieve with your often limited income, you now have to sort and prioritize them. It helps to sort goals based on timeline and importance. But first, sort your goals by how long you will require achieving them.
Short-term, medium-term, and long-term financial goals:
- Short-Term: These usually have a time horizon of a year. Such as saving for a vacation overseas, building up an emergency fund or eliminating credit card debt.
- Medium-Term: Medium-term goals are those that are achievable within five years. These include saving for a down payment on your first home, buying a new car or any other significant expense.
- Long-term: Long-term are those goals that can take over five years to actualize. It could be achieving financial independence before age 40 or building a solid nest-egg for when you retire
After this time-based sorting, you next consider them in order of importance. Some of these goals may be linked because most short-term goals are the basis for long-term goals. Some may be a one-off event, and some may be recurring annually.
It’s essential, as you choose and work towards any particular goal or set of goals, to apply the SMART principles especially monitoring. A given goal that is achievable and specific will allow you to complete it in the given time frame with adequate monitoring.
Now that you have identified and ranked your goals, how do you go about achieving them?
The 3 steps to help you get started with your money goals.
Step #1. Determine your current financial position
You can’t get started on your money goals if you don’t know how much you earn, spend and keep. It’s all too easy to be broke before your next paycheck if you don’t use a budget and track where the money goes.
It’s therefore pertinent that you carefully look at your financial situation.
How much money exactly do you have? Tabulate all your accounts,- savings and checking accounts, even your IRA. Also include your investments and assets, for instance, your home.
Then determine all your debts. These include student loans, mortgage payments, credit card balances, etc. the difference between the two is your total net worth.
If it’s a substantial amount, then fine and good. If it’s not much or even in the minus, don’t fret, we are here to help.
Now that you know how much bread that is in your name, the next step is to track your income and expenses. Your financial progress is hinged on knowing where your money goes. There are a lot of financial apps to track your spending habits. One of the most popular is Mint. However, you can use good old excel or write it down on paper the old-fashioned way.
Step #2. Create a Budget
Now that you have an idea of how much you’re worth (financially, that is)? Good. Now it’s time to develop a working budget. A budget is a plan of what you intend to spend within a time frame, most commonly a month. This means adding up your expenses for the month and comparing them to your income.
List all the expenses you make in a month under specific categories. Then minus your total costs from your total income. The balance is what will be in your account at the end of the month.
This is the money that you will use to achieve your set financial goals.
If you want to increase the amount, go through your expense list again and pick line items you can do without. Is that cable bill utterly necessary when you can use Netflix?
Do you need to eat out every other day.?
There are always things you can cut from your monthly expenses to give you a bigger balance at month’s end. Fix an amount you can spend in a month and still align with your financial goal and maintain it.
Now, you have successfully gotten control over your money. It’snow easier to arrange what you want to do with it.
Step #3. Determine your target savings
Now you’ve got a grip on your finances, it’s time to set your target savings amount. Say you want to save towards your financial freedom in the next 10 years and retire early. You should be able to determine from your budget and tracking your expenses the ideal amount of money that you can live on without having to work for the rest of your life. Let’s say you arrive at the tidy sum of $500,000. That comes to $50,000 a year and breaking it down further, $4,167 monthly.
By now, you should have figured out how much you’ll be able to sock away monthly from your paycheck. If the amount is below your monthly target savings amount, you can look for further line expense to reduce or outrightly eliminate. You can also start up a profitable side hustle to boost your income and help you save more.
As you go along, you can alter your goals to suit your changing circumstances. Maybe your paycheck has been increased, and you can comfortably put away more than your monthly target savings. This means you could hit your saving goal well before the time frame.
This method can be applied for whatever goals you are saving for. While it’s not always easy, it’s doable with this time-tested strategy.