Whether you intend to acquire a new car or you plan on going on a luxurious vacation, you have to create a financial goal and rigorously save money for it.
I still remember when my baby brother was around six years old. He woke up one day and told our dad that he wanted a bicycle, and our dad immediately promised to get one for him.
But interestingly, that was not exactly how my baby brother wanted to get the bicycle. He didn’t want the bicycle to be bought for him. Instead, he claimed that he would buy the bike himself, using his own money.
We were all engulfed in laughter when he said this. It was ridiculous to see a 6-year-old boy saying he wanted to purchase a bicycle with his money.
He literally didn’t have any money, so we believed his dream was one of those far-fetched financial goals some people have.
More Read
Having asked how he intended to get the bike, he said, “he would save a dollar every week from the money he forcefully takes from our mom to get candy.”
I watched my 6-year-old brother save money for his bicycle for a few months. At a time, I felt he might achieve his financial goal because of how resolute and strong-willed he was. But sadly, this dream didn’t come to fruition.
As little and naive as he was, my baby brother realized it would take a very long time for him to save enough money to purchase his bike, and it would take years for his weekly savings of a dollar to buy a bicycle.
Considering this, my kid brother decided to settle for a wristwatch instead. Although he didn’t achieve the intended goal, he achieved something nonetheless.
The crux of this story is that we may only accomplish some things (requiring money) once we consider them as financial goals.
The essence of this post is to give you insight into how to set financial goals successfully, even if you don’t know much about financial planning.
Before we get started on how to set your financial goals, let us consider these few questions:
What Is A Financial Goal?
Financial goals are spending targets, savings, or investments you intend to accomplish over a fixed time; this could be within a few weeks, months, or even years.
More importantly, your financial status or the stage you are in life would determine the kind of financial goals you’d set.
For example, if you are a college student, you can’t easily set a financial goal to buy a car. Instead, you might set short-term financial goals to purchase a laptop or rent a small apartment.
On the other hand, however, a man who has a growing family and a high-income job can set long-term financial goals such as saving for a child’s education, retirement, a vacation, or a new home.
Why Is It Important To Have Financial Goals?
You may have heard the saying, “Proper preparation prevents poor performance.” That’s the main idea behind setting a financial goal.
You can’t just wake up one morning and say you want to purchase a brand-new car.
It doesn’t make any sense because your financial status may not fit that goal, and even if you have the money to purchase the car, you can’t tell if you are getting the car to the detriment of something else that is much more needful.
This is why it’s essential to set financial goals. With feasible financial planning in place, you can determine the possibility of achieving certain things. Also, a financial goal helps you accomplish things without wrecking yourself financially.
How To Set A Financial Goal?
Knowing how to set financial goals should begin with examining your current financial status and determining how feasible it is to achieve your financial goals.
First, consider if your financial status enables you to achieve a long-term or short-term financial goal.
Moreover, make sure your financial goal is a top priority, not just some mere fantasy or shallow desire. Ensure it’s something that would add some significant value to your life.
How To Set Financial Goals – 6 Simple Steps
Whether you are a high-income earner or a low-income earner, you can learn how to achieve financial goals that will aid you in living a comfortable and fulfilled life. The 6-step process revealed below will show you exactly how to set and achieve your financial goals.
1. Gather Your Financial Paperwork
When setting long-term financial goals, you must first begin by assembling all your financial statements, which include:
- Bank Statements
- Recent Utility bills
- Credit card bills
- Investment accounts
- Mortgage or auto loan statements
- Receipts of expensive items bought in the last three months
The primary reason for gathering all these documents is to determine your financial status and your ability to embark on the financial goal you must have chosen.
For instance, if your financial desire is to save for a car, you must first examine all these financial statements to determine if you can conveniently achieve that goal of purchasing a car.
Short-term financial goals don’t necessarily require this process because you are not really investing so much money. But if your financial goal is quite demanding, you must take this first step.
If you realize that you owe too many debts after examining all your financial paperwork, you may have to reconsider your chosen financial goal.
On the other hand, you may have to take some time to work on your finances and ensure you are financially fit to embark on any financial goal.
2. Calculate Your Income
Having examined your financial paperwork, the next important step is calculating your income.
The accomplishment of all types of financial goals is determined by a person’s in-flow of income.
Whether you are an employee or a business owner, calculate how much money goes into your account every month.
Identify your take-home pay or net income per month as an employee who receives a regular paycheck where taxes are deducted automatically.
On the other hand, if you are a freelancer who earns variable income, you can determine your monthly take-home pay by using the revenue from your least-earning month.
Remember, your income as a freelancer is not fixed, so to be on the safe side when calculating your monthly income, you should use the least amount you have previously earned within a month.
Calculating your income before setting financial goals is very important. Having calculated your income, you can be sure if your financial goal is far-fetched or not.
If you earn $10,000 after taxes, it means you can conveniently set and achieve a financial goal that would cost you $5000.
Moreover, this doesn’t mean you have to split your $10,000 monthly income to achieve the financial goal as soon as possible. It would help if you took your time, giving yourself a couple of months to achieve it.
3. Create A List Of Monthly Expenses
Everyone has expenses, including you. Before setting financial goals, you have to identify a list of the typical expenses you incur every month. The list could include:
- Rent or Mortgage payments
- Insurance
- Utilities
- Personal care
- Child care
- Car payments
- Eating out
- Travels
- Transportation fares
- Savings
- Debts
Your expenses could be more than the list mentioned above based on your lifestyle and how much you earn in a month.
But that’s not necessarily the case. What’s important is that you take your time to identify all the things you spend money on every month.
Examine everyday bills like your utilities and even emergency expenses that you don’t typically plan for.
Moreover, while creating a list of your monthly expenses, make sure you identify the fixed and variable expenses.
Some expenses don’t change. They have a fixed amount of money you spend on them every month, such as your utilities, Cable TV, transportation fares, and even debts.
But expenses like child care, personal care, medical bills, and eating out aren’t fixed. The amount you spend on these expenses could increase or surprisingly decrease.
In a situation where you can’t identify all your expenses, you can use your credit card statements, receipts, and bank statements from the previous months to determine your current monthly expenses.
4. Total Your Income And Expenses
Once you have examined your financial statements, calculated your income, and compiled a list of your monthly expenses, the next important step is to total your income and expenses.
This means that you have to determine if your income is higher than your expenses or if it’s the other way around.
In a situation where your income is below your expenses, that’s a big red flag telling you that your financial intentions are impossible to accomplish.
This means you have to find a way to increase your earnings to surpass your expenses before you start working towards a financial goal setting.
Moreover, whenever your expenses are bigger than your income, it simply means you are living above your means, spending more money than you earn. You’d have to make some changes to how you spend money.
On the other hand, if your income is much more than your expenses, it means you can have extra cash to save or invest in a financial goal.
5. Make Adjustments To Expenses
The moment you realize that your expenses are beyond your income, you have to find effective ways to cut down on your variable expenses to safe some extra money.
Remember that your variable expenses are not fixed, so you have the opportunity to reduce how much money goes there.
For instance, if you are used to eating out, you should start preparing your food. If you usually attend gym classes, you could stop for a while and save the money you spend on it. Also, examine any other variable expense that isn’t vital to you.
On the other hand, you can find a way to increase your income to match or surpass your expenses. You could start a side hustle or work multiple jobs, as long as you can handle it. There are millions of Americans working multiple jobs to make ends meet.
6. Start Saving Towards Your Financial Goal
Having completed steps 1 to 5, the last and most important thing to do is start saving towards your financial goals.
Whether it’s an investment, vacation, or you simply want to purchase something expensive, start saving a portion of your monthly take-home pay.
Most of the time, the best way to do this is by automating your savings. Have a valid savings account that automatically claims a certain amount of money once a month or based on your preferred set time.
More importantly, it would be best to track your progress after a while. Ensure that you are not incurring more expenses or debts while achieving your financial goals. The fewer expenses you have, the higher the chance of success in your financial goal setting.
If you eventually feel you need some in-depth professional help, speak with a seasoned financial advisor.
A financial advisor is usually in the best position to answer all your questions concerning financial planning.
Conclusion
This post has shown you how to set financial goals with a 6-step practical process.
Hence, there shouldn’t be any reason for you to be confused about mere questions, such as what are financial goals? Or what are the types of financial goals one can set?
More importantly, you must understand that sometimes achieving a financial goal may take time, and you may have to wait for months or even a few years before some financial goals can be achieved.
Nevertheless, this shouldn’t deter you from trusting the process because all your efforts will eventually be rewarded by the time you succeed..
