Planning Your Financial Goals is the Key to Your Financial Success

Money is important! You need to take care of your financial life so you can take care of yourself and your family. The more control you have over your finances the better off you’ll be, and the best way to control your finances is to set financial goals.

There is no better time than now to evaluate your finances and set financial goals for yourself. But don’t worry. It’s not complicated. Actually, it’s quite simple, but it does take action.

What are your assets and liabilities?

The first step is to see exactly where you stand financially. To do this, you’ll need to collect all your financial data. Gather all your financial statements. This includes checking, savings, and investment accounts, any employer retirement plans, IRAs, and any other assets you have. You also need to gather all your debt information including credit cards, student loans, car loans, your mortgage, etc. 

So, where do you stand?

If you’ve never taken the time to add up all your assets and debts it may be uncomfortable. You may find that you have a lot more debt than you thought. You may realize you have hardly anything saved for retirement. You probably already have a pretty good idea of how your finances are, but now you’re seeing firm numbers. But once you see where you stand, you can set your financial goals. 

When setting your financial goals, there are two things you should do first: Get any debt under control, and make sure you have an emergency fund.

Do you need to pay off all your debt before you save and invest for other objectives?

There is no one cookie-cutter answer. But one thing is certain: the more debt you carry, the harder it will be to achieve your financial goals. Monthly payments on your debt take away from money that can go towards other goals. And the interest you’re paying on most debt is likely higher than what you’d make on your saving account and even your investments.

I suggest paying off your high-interest debt first (i.e. credit cards). Next, I would aggressivity go after your other debts, like student loans. Less debt equals more cash flow.

Make sure you’re you prepared for a financial emergency.

At any time, you can face unexpected financial hardship such as sudden job loss, medical bills, or an expensive car repair. To be prepared, you should have an emergency fund with enough money to cover three to six months of living expenses. The emergency fund should be set up in a separate account that you will only touch in case of an emergency. And the money should be in cash (not stocks or bonds). Not having an emergency fund can set you back when it comes to meeting your financial goals.  

Once your debt is under control and you have an emergency fund, you are in a good position to start working toward your other financial goals.

The steps are simple. First, identify your goals. Next, determine how much money is needed for each goal, and when you need it. Finally, make a savings plan as part of a budget.

Your time frame is important because there is a big difference between planning for short-term goals and long term-goals. When it comes to financial planning, what the money is going to be used for does not matter nearly as much as when you need the money.

Saving for Short-Term Financial Goals

Short-term goals are money you’ll need in three years or less. Some examples of short-term goals might be a vacation, home improvements, new furniture, a down payment for a house, or a new car – but it can be anything! The money for short-term goals should not be put at risk. No stock market here. You don’t have the time to recover if the market takes a downturn.

You should put money for short-term goals in federally insured savings accounts, short-term CD’s, money market accounts, or short-term treasuries. You want to be able to protect your principal investment and have easy access to your money when you need it.

Saving for Long-Term Financial Goals

Long-term goals are goals where you don’t need the money for ten or more years. Common long-term goals include retirement planning and saving for your kid’s education.

Planning for long-term goals is more complex. You can’t actually know for certain exactly how much you’ll need. A lot can change in ten or twenty years. Plus, you also have to contend with inflation.

However, there are a lot of tools available that will give you a good idea of these numbers. Take retirement planning for example. There are retirement calculators that take into account your anticipated social security benefits, money you already have earmarked for retirement, expected rate of inflation, and the time value of money. You plug in the numbers and it will estimate how much you need to be saving. There are similar tools for education planning as well.

You can take more risk investing for your long-term goals because you have time to ride out the ups and downs of the financial markets. The majority of your investment portfolio for a long-term goal should be invested in a well-diversified portfolio of stocks, which have historically provided the greatest return over the long run (compared to bonds, cash, and cash equivalents) and have outpaced inflation. Be mindful of your risk tolerance, though. There is no guarantee that stocks — or any investment — will provide the same return they have in the past.

When planning long-term goals, make sure you take advantage of the various tax-preferred accounts. For example, if you’re saving for retirement, there are employer sponsored plans like a 401k and IRA accounts. For education savings, there are 529 Plans and Education Savings accounts.

Saving for Mid-Term Financial Goals

What about mid-term goals where you’ll need the money in between three and ten years? This money may be needed for the same things as your short-term and long-term goals. In fact, your mid-term goals may have once been your long-term goals but the date you need the money is getting closer.

Planning for these mid-term goals is similar to planning for your long-term goals. The major difference is going to be how you invest the money. And it is a bit more complicated. You don’t have a long time horizon, so you can’t take on the same amount of risk. But you still have to contend with inflation and probably want a decent rate of return to help achieve your objectives.

What you need is a balanced portfolio between stocks, bonds, and cash. As you get closer to the time you need your money, you’ll need to decrease the percentage of your portfolio you have in stocks and increase the percentage to bonds and cash. Eventually you will want it all in cash as you approach the date you need the money.

Budgeting for Your Financial Goals

You can’t achieve your financial goals unless you put money towards them consistently. And there is only one way to do that: create a budget.

How much money should you be putting towards your goals? To find out, you need to take a look at your cash flow.

First, identify all your sources of income. This includes wages from full- and part-time jobs, gifts, alimony, rental income, and anything that brings in cash for you. Then, you need to add up all your fixed and variable expenses. Fixed expenses include items like your mortgage or rent, car payment, certain utility bills, and taxes. Variable expenses are those you have some degree of control over such as groceries, entertainment, and travel. Deduct your expenses from your income to see what is left. That is your discretionary income. This is the amount you can put toward your financial goals

You may find your discretionary income isn’t enough to meet all your goals. That’s not uncommon, and there are measures you can take:

  1. Take a look at your variable expenses. Where can you cut? A good place to look first is your meals and entertainment.
  2. Increase your income. This is not an easy option but it is still an option. Maybe it’s time to find a better paying job. Can you get a second, part-time job? Is there a hobby you can turn into a small business?
  3. Prioritize your goals. Some may need to be put on hold. Maybe new furniture is not that important. I recommend always keeping retirement as a priority. If you’re coming up short on income while you’re working, what are you going to do when you are retired?
  4. Modify your goals. For example, if you are planning on getting new car, you may need to look at a more economical one. Or you can extend the time period for some goals so you have more time to save.