How to Set Financial Goals

Budgeting, Personal Finance
how-to-set-financial-goals

It’s natural to feel lost or overwhelmed as you begin to think about setting and balancing financial goals. Start by answering this question: How do you define success?

That’s what Quentara Costa, a certified financial planner with Powwow in North Andover, Massachusetts, asks her clients.

Success means different things to different people. For some it’s a luxurious lifestyle complete with a big house and fancy car. For others, it’s owning a business or having enough financial security to avoid stressing about money. Visualize where you want to be in the future and set aspirations that align with your values. Make sure to leave room for immediate goals as you form a plan.

Find your inspiration

Think not just about what you want to do, but why you want to do it. Attaching reasons to your goals can put them in perspective and fuel motivation. Build up an emergency fund so you can afford to pay rent if you lose your job. Get rid of credit card debt so you can put your income toward a wedding instead of interest payments.

Setting goals can increase your likelihood of success. According to the 2017 America Saves Week survey, 56% of American households with a plan report making good or excellent progress meeting savings needs, compared with 24% of households without a plan.

Examine your situation

After giving it some thought, you may have multiple goals in mind and don’t know what to do next. Or maybe you don’t have specific goals. That’s OK. Looking at where you stand right now can help set you on the right trajectory, whether your ambitions are short term, long term or have yet to be identified.

“While all goals and the priority of the goals are unique to the individual, there are certain high-level ideas to consider,” says Steve Martin, wealth planning advisor at Oasis Wealth Planning Advisors in Nashville, Tennessee.

Start by assessing your income, income tax situation, budget and net worth. “Having an understanding of these four things will help determine goals and prioritization of those goals,” Martin says.

Check your financial health score to get a quick overview. The higher the score, the more flexibility you have to set goals. A lower score signals that certain goals need attention. We’ve listed some examples below, and recommend attacking them in this order:

  • Create a budget. If you don’t have a budget, make one. This can keep all your other goals on track by preventing overspending and under-saving. We suggest taking the 50/30/20 budgeting approach. Allocate your income three ways: put 50% toward needs, 30% toward wants and 20% toward savings and debt repayment.
  • Build an emergency fund. A healthy emergency reserve acts as a safety net during financial shocks like a job loss or unexpected medical bill. We recommend you save up enough to cover three to six months of expenses, or at least $500.
  • Save for retirement. Retirement may be decades away, but it’s important to start saving as early as possible so that you have enough money to survive on when the time comes. Most experts recommend saving 15% of your gross income each year. If your employer offers a 401(k) and matches your contributions, take full advantage of that free money.
  • Pay off debt. Focus on paying down high-interest toxic debt first, like credit card debt or payday loans. Then, pay down lower-rate debt like student loans or a mortgage.

Treat yourself

Setting goals doesn’t have to feel like a chore. Reward yourself for making progress and completing objectives. Once you’ve tackled high-priority goals like building an emergency fund, saving for retirement and shrinking debt, you can focus on more exciting goals. These might include making more money, investing, starting a business or saving for a major purchase like a laptop, car or house.

Think ‘SMART’

Consider all the necessary pieces of a plan — not just the goal, but the steps you’ll take to reach it. Costa says a strong basis for setting any goal is to make sure it’s “SMART”: specific, measurable, achievable, realistic and time-bound.

For example, say you want to save for a vacation. Lay out the details before you move forward: Pick a destination, decide when you want to go and estimate the cost. Determine whether this goal is doable and practical given your income, savings and expenses. If the goal seems out of reach, try to make adjustments before scrapping the idea entirely.

Maybe you’re not on track to save enough for a trip to China in six months. Push your deadline back to a year, automate your savings, or open a new savings account with a higher interest rate and a sign-up bonus to speed up your progress.

Write them down

After you’ve identified and vetted your goals, mark them down. This can keep objectives clear, organized and tangible. Fill out a worksheet or spreadsheet, or use a notepad. Check in periodically and track your progress. Once you’ve crossed off one goal, move on to the next.

Lauren Schwahn is a staff writer at NerdWallet, a personal finance website. Email: lschwahn@nerdwallet.com. Twitter: @lauren_schwahn.