What good is having money if you do not have a plan for it? Goal setting is crucial to long-term financial success; however, getting to goals takes some true grit and realism. Before you set pen to paper and decide on a list of lofty goals, take a step back and evaluate the realism of them.
-Budget
It almost goes without saying that in order to set savings goals or investing goals that you need to have a budget in place. Good budgets are concise, easy to read and all-inclusive. List out all of your monthly expenses and subtract that from your income; this is your disposable income, and the pot of money you will use to draft your savings and investment goals.
-Short-term vs. Long-term
Short-term goals are important in financial goal setting. For example, ask yourself what you want to do with your money over the next year. Do you want to go on a vacation, open an IRA or have enough money to start investing in stocks and bonds? Write down a list of at least five items you would like to use to grow your wealth over the next 12 months.
From here, create your long-term goals. What do you want to do with your money over the next 5 years? For some folks, it is starting a business, buying a home, or purchasing a franchise; list out at least five long-term goals.
-Get Real
Looking at your goals, some might be a bit lofty. Now it is time to get real. Take a good, hard look at your budget, and evaluate how much you are saving. You should be saving at least 10 to 15 percent of your gross (pretax) income. Once you have at least six months’ worth of salary in the bank, apply your savings money toward investments, like stocks, bonds and retirement accounts. Regardless, your savings needs to be a line item on your budget.
Take a hard look at how much you are saving and ask yourself, “Is it enough to reach the goals I am setting?” Chances are you are not saving enough, probably because there is not much more you can save. Weigh the cost of your goals against your budget and make some modifications.
-Goals need to be…
Goals need to contain three major elements: they need to be measurable, attainable and time-oriented. In other words, you need to be able to measure your progress toward meeting a goal at regular intervals, they need to be down-to-earth enough for you to accomplish them and they need to have a time limit. For example, you could write a goal like “I want to save $10,000.” While that is a good start, it is not good enough. Modify this goal based on your financial data. Instead, try, “I will save $10,000 by putting $500 in savings over the next two years.” Viola, you have a goal that is actionable, measurable and has a viable method attached for accomplishment.
Financial goal setting is a very personal matter, and the truth is that you could probably be saving more than what you are now by foregoing some minor, impulse expenditures. Regardless, when writing financial goals down on paper and weighing those against your budget is an eye-opening experience. It is from this exercise that many people see where they could be saving more, spending less and drawing a road map to success, instead of imparting roadblocks on yourself along the way.