How To Set Financial Goals

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Author: Joseph Reinke, CFA

There are two big problems I see when people are planning their finances: They don’t have financial goals or they have bad/unattainable financial goals.  This article details how to set financial goals the correct way so you can maximize your chances of success.

How To Set Long-Term Financial Goals

When building a financial plan, you should build multiple plans.  Then you want to compare plans to see which one allows you to best reach long-term and short-term financial goals.

I define long-term goals as a goal that will take more than one year to accomplish.  Typically, these goals are completely paying off some debt or saving for retirement.

Many financial “influencers” I’ve seen actually tell people to ignore long-term financial goals such as retirement because it is so far away.  I’ve also seen “financial experts” say retirement is the most important because of the compounding effect on investments.

I say neither is right!  You might not want to ignore investing for retirement because there may be big benefits of investing now that aren’t related to compounding.  For example, getting a match on your 401k or investing in a Roth IRA for retirement income diversification.

At a minimum, I suggest putting enough into your 401k to get your employer’s match as well as putting at least $25 – $100 a month (depending on your income) into a Roth IRA.

From there focus on your short-term goals.

How To Set Short-Term Financial Goals

Short-term financial goals consists of goals you can achieve this year or may be part of a broader, long-term financial goal.

Financial goals you can achieve this year are items such as saving for a wedding, saving for a down payment on a car or house, saving for a vacation, etc.

The tricky part is that the broader end goal may not happen this year.  For example, you might need to save $20,000 for a down payment on a house but can only save $500 a month.  Therefore, you may set a short-term financial goal of saving $6,000 over the next year.

I believe that hitting your short-term goals are the most important because it develops good behavior.  The faster you achieve your short-term financial goals, the more likely you are to continue pursuing your longer-term goals as well as build and implement a sound  financial plan.  FitBUX views setting short-term goals as being so important that our technology sets monthly goals and we update your FitBUX Score daily!

Know The Why

Before I go into setting specific financial goals, I want to discuss one of the biggest mistakes people make.

When setting financial goals, many people simply state they want to spend less, invest more, etc. simply to have more money. 

However, when asked why it’s important to them to have (more) money, they often can’t articulate a clear answer.  Unfortunately, if you don’t have a clear sense of why you’re doing “something”, you are very likely to give up half-way and never hit your goal.

For example, when I was saving to buy a house, it wasn’t because I couldn’t wait to do yard work, clean toilets, vacuum a bigger house than the condo I lived in, etc.  When I was growing up, my grandmother had a large backyard and I spent a lot of time outside. I loved it.

I wanted my newborn daughter to have the same experience instead of having to grow up in a condo.  Therefore, my goal had nothing to do with money and wanting a bigger house just to have one.  It was focused on something I deemed more important than money. It was for my daughter.

Your goals need to be developed the same way.

How To Set Realistic Financial Goals

For every financial goal, both long-term and short-term, I highly recommend doing the following:

Write Each Goal Down

One of the biggest reasons people don’t accomplish their financial goals is they don’t write them down.  Writing down your goals does more than just allowing you to remember them. It makes you accountable for achieving them or not achieving them.

Make Financial Goals Specific & Measurable

Saving for a down payment for a house is not a good enough goal.  You have to put an actual dollar amount to it. I.e. In the long-term I need to save $15,000 for a house.  In the short-term, I’m going to save $2,500 every six months.

The more granular and the more you tie in the ‘why’ the better.  For example, I’m saving $3,000 for my family vacation in 6 months.  The trip will cost $2,500 for food, hotels, travel, etc. However, I want to save an extra $500 so my daughter can do xyz while we are there.

Set A Deadline

You don’t want to be saving for a “dream” vacation and then, 20 years later still be telling yourself you are saving for a dream vacation.  Make sure you have a deadline to achieve your financial goals. Of course, you will want to make sure your goals are achievable.

For example, I hear all the time from folks fresh out of school: “I want to pay off my $100,000 in student loans in a year and I make $50,000 a year in total income.”  Sorry, the math does not add up. Be realistic with yourself.

Setting Financial Goals For Key Financial Areas Of Your Life

There are multiple steps to building a holistic financial plan which takes into account multiple aspects of your life.  Four key items to your plan are  income, day-to-day expenses, savings/investments, and debt.

One huge mistake is that people don’t set financial goals for each one of those categories and only focus on some of them.  I detail below how to set financial goals for each category.

Income Goals

Income goals are the most overlooked financial goal.  However, they are the most important in my opinion because income can grow infinitely.  Income goals can take a number of different formats.

For example, you can have an explicit performance-based goal that will lead to an increase in income if your income is (partly) based on commission and associated triggers.

One huge area that is overlooked but extremely important for young professionals is to set income goals by increasing your human capital.  This may be doing something such as learning a new skill that will increase your potential income in the future.

Day-To-Day Expense Goals

This is the area most people spend time on when it comes to budgeting and setting financial goals. Truth be told, I believe that it is the least important.  Income can grow infinitely, cutting expenses is finite, i.e. you can only cut expenses so much.

In short: look at what percentage of your total income is going where, cut the biggest day-to-day expenses as much as you can, and move on.

Savings/Investment and Debt Goals

This can be broken down into three parts:

  • First, determine your most important financial goals.
  • Then, put the minimum to your 401k to get a company match if it’s available to you. put the minimum amount to Roth IRA, budget for minimum payments to your  debt.
  • THEN, put 100% of your remaining money towards it.

Simple Way Of Implementing Financial Goals

You’ll want a way to track your progress towards your financial goals.  That means you’ll want to track your income, day-to-day expenses, savings/investments, debt, etc.

There are numerous was of doing this but each way has its flaws.  That is why we created our financial planning technology, the FitBUX Score, and offer free access to FitBUX Coaches.  Our platform makes money management easy and we hope you take advantage of it.

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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