Setting financial goals can be really exciting. It is a chance to dream about the kind of life you want to live and the things you want to have. It could be a house. Or financial security. Or a comfortable retirement.
Or maybe you have some short-term financial goals, like starting an emergency fund, or saving for a wedding, a home improvement project, a vehicle, or a vacation.
Whatever your goal is, odds are it is going to take some work to get there. It is not enough to simply set a financial goal. If you want to reach it, you need to create a plan. Here is how to do that.
Establish a Timeline
You cannot predict exactly what will happen every step of the way on your financial journey. Without setting a budget, you will not know exactly how much you can afford to put toward your goal each month. But regardless of how big your goal is, it helps to have an idea of how soon you would like to accomplish it. Is this a goal that will take months, years, or decades?
Deciding how fast you want to reach your goal is part of setting your goal in the first place, but it is also an important step toward ensuring you can achieve your goal.
This does not have to be a rigid timeline, and it is OK for it to be aspirational, but try to be realistic, too. Your desired timeline will affect how much you will need to budget, and if your timeline is unrealistic, you will need to drastically increase your income or decrease your expenses.
As you try to decide on a timeframe to accomplish your goals, be sure to think about what you would have to set aside each month to get there. If your goal is to put 20% down on a house that costs $300,000, and you want to do that in the next 2–5 years, how much would you have to set aside each month to save $60,000 based on that timeline?
This process will help you see what it would take to accomplish your goal, so you can decide if you need to either change your goal or make some other changes to your life first (like creating additional revenue streams or finding ways to save money).
Break Your Goal Into Specific Objectives
Short-term goals do not need this as much, but creating smaller goals gives you specific, actionable objectives that work toward your bigger goals. A short-term goal like, say, “save $1,000 for an emergency,” can probably be considered a single-step goal, because it is less complex and more concrete than a goal like “achieve financial security.”
If your goal is to get out of debt, you do not want to aimlessly allocate a certain amount to disperse across all your debts each month. Most experts suggest you prioritize the debts with the highest interest rates and the highest principles while making minimum payments on the others. This has the biggest impact on your debt as a whole. But others, like Dave Ramsey, advocate for people to focus on their smallest debts to get them out of the way and build momentum. Ramsey calls this the “snowball plan.”
In either case, you are treating each debt as a “mini goal,” or a step toward your larger goal of becoming debt free
Explore Your Opportunities
Take inventory of the opportunities to earn money between now and when you would like to reach your goal. Do you need to sell your car? Get another job? Rent out a room in your house? Is there a hobby you could monetize?
These opportunities do not have to be directly connected to your goal, but they contribute to your ability to achieve it, and the additional income will also help ensure that you will not be derailed by financial setbacks.
Create a To-Do list
Depending on where you are at on your financial journey, a big goal like financial security might have many smaller goals within it, like this:
- Pay off student debt
- Open a Roth IRA
- Maximize 401K contributions
- Save for a down payment on a house
- Buy a house
- Reduce cost of living
- Save six months worth of income for an emergency fund
- Develop additional streams of income
- Pay off mortgage in 15 years
- Save enough for 20-30 years worth of expenses
Your priorities and circumstances will determine exactly what steps you will want to include and what order you will want to accomplish them in, but the point is that you are turning your goal into specific objectives you can accomplish. It is a “to-do list” for your financial goals.
Create a Budget That Accounts for Your Goals and Your Timeline
No financial plan would be complete without a budget. You cannot expect to reach your goals if you are not paying attention to how much money you have coming in and how much you have going out each month.
Start by adding up all your regular income sources. Paychecks. Stipends. Hobbies. Interest. Any source you regularly receive money from should go here. Next, calculate your total expenses, group them into categories like food, entertainment, transportation, and housing.
How much is left to apply toward your goal? How does that measure up with your timeline for your goal? Most likely, you will need to make some changes to your regular expenses. If you apply the amount you want toward your goal each month, what expenses can you reduce to make up for it?
Sometimes you just need to find a few simple ways to save money to reach your goals, but in other cases you may need to make bigger life changes. Good goals are worth sacrificing for, but this is where you will need to decide how much you are willing to sacrifice to get there.