Financial goals are a key to building wealth
What are financial goals?
Your financial goals are where you would like to be financially in the short-term, mid-term, and long-term. If you do not have financial goals that you are working towards, you will be likelier to spend more than you should. Financial goals are the key to working toward financial security and independence.
If you are wondering how to set financial goals, you should begin by understanding your current finances. You need to understand the value of your assets and of your liabilities. You should also determine how much you are spending so that you can have a better idea of what you need to work towards to achieve.
Once you set your goals, you need to continually work on them. Your personal financial planning should not be a one-time task. Instead, you should conduct financial planning and a review of your goals at least annually so that you can make adjustments as needed.
Financial goals: The trends
Financial statistics reveal a sobering picture. For example, the Associated Press reports that 66 percent of Americans would have difficulty coming up with $1,000 in the event of an emergency.
Among adults, 35 percent have negative notations in their credit reports, and only 46 percent have an emergency fund. Among adults who are older than 60, the number who have student loan debt has increased fourfold in the last 10 years.
These trends are troubling, and they all point to a need to learn how to set financial goals and to write financial plans. Without financial planning and goals, you might end up becoming a problematic financial statistic like millions of other Americans.
Why setting financial goals and personal financial planning are important
Everyone has things that they would like to purchase and ideas of what they would like to do. You might want to purchase a home, pay for your children’s college educations, go on vacations, and acquire other things. You might also know in the back of your mind that you need to save money for your retirement so that you will be comfortable.
However, if you do not engage in personal financial planning and goal-setting, it will be difficult for you to achieve any of the things that you dream about. A financial plan and good financial goals are the keys to helping you along the path to financial independence and freedom.
Types of financial goals
Financial goals can be divided into two categories, including short -term goals and long-term goals. Each of these types of goals has different time frames, and your plan should incorporate both.
Short term goals
When you are working on your financial plan, you should first take the time to think about your short term financial goals. These are goals that have a time frame of fewer than three years. Good short-term goals might include such things as saving an emergency fund and paying off your high-interest debt. Other short-term goals might be to do the following:
- Purchase new furniture
- Complete minor home improvements
- Saving money for a down payment on a vehicle
To accomplish your short term financial goals, you need to engage in financial planning. You should start by tracking your expenses and creating a budget. To track your expenses, log everything that you spend during a month, including small purchases that you make with cash. Place the expenditures in categories so that you can identify areas where you are overspending.
Tracking your expenses for one month can give you insight into where your money is going. You can then use the information that you gather to create a budget. You can cut back in categories in which you are overspending and figure out how much to cut from each one. You will also want to complete a valuation of your assets so that you can determine your current net worth. The goal is for you to increase your net worth and to decrease your debt.
Once you have created a budget and have cut some extraneous expenses, you can then take the excess money that you have shaved from your spending to save towards an emergency fund and to pay down your high-interest debt.
Experts recommend that you save a minimum of three months’ worth of your living expenses for an emergency fund. For example, if your monthly living expenses total $4,000, your financial goal should be to save at least $12,000. If something unexpected happens, you will then have some money to cover your expenses until your situation improves.
If you have a significant amount of debt, you should also concentrate on paying it down, starting with your high-interest debt. Many people find that an effective strategy for paying down debt is to create a budget and devote extra money to pay towards the principal of the debt with the highest interest rate. Once that one is paid off, the money that they were paying each month towards that debt can be devoted to the next highest-interest debt and so on. This type of strategy may help you to get out of debt as long as you do not add new debt to the mix.
Your long term financial goals are goals that have a time frame of more than 10 years. These might include such things as the following:
- Saving up for retirement
- Saving for your children’s college
- Managing your finances so that you can purchase a home
To meet your long-term goals, you will need to create a personal plan. Your financial plan for your long-term goals should include estate planning and retirement planning.
Establish your personal financial plan to meet your goals
Once you have identified your short-term and long-term goals, you will need to engage in the personal financial planning process so that you can create your individual financial plan. To understand what you should have in your financial plan, a financial plan example might include the following components:
- Plan for savings
- Investment plan
- Income tax plan
- Insurance plan
- Estate plan
- Retirement strategies
- Long-term care plan
- Plan with goals by the decade
We will take a more in-depth look at each of these different components of a good plan.
Your plan for savings should begin in the short-term while also planning for long-term goals. If you have a 401k at your job, you can start by contributing at least the matching contribution amount. If you can, you might want to try to save at least 10 percent of your modified adjusted gross income every month.
Your plan for savings should include plans for saving up your emergency fund. If you are uncertain as to how much you should save for your emergency fund, you can try an emergency fund calculator. Once you have determined the amount, you should then work to save it up and keep the money in a fairly liquid account such as a money market fund.
In addition to your emergency fund, you should also be saving for your retirement. While retirement might seem like a long ways off if you are young, implementing retirement strategies early can help you to be more comfortable with less work than if you wait until you are older to try to save.
The next component of your financial plan should be your investment plan. You will need to identify your risk tolerance and then work to build your portfolio. If you are young, you will likely have a higher risk tolerance than if you are older and nearing retirement age.
You will want to choose the types of accounts that will work best for you to reach your goals. Your investment plan might include a 401k at your job, a traditional IRA, a Roth IRA, or all three. If you are able to make the maximum contributions to your retirement accounts, you might also want to include a taxable brokerage account to build even more wealth.
Income tax plan
A commonly overlooked area in personal financial planning is an income tax plan. This type of plan can help you to save substantial sums. It might make sense to talk to a tax professional for advice about maximizing your deductions. Your investment strategy can also help you to save money on your taxes. For example, if you are self-employed, you might want to consider opening a solo 401(k) or a SEP IRA so that you can save money on your taxes while saving towards your retirement.
Contributions to some types of retirement accounts can reduce your taxable income and the taxes that you will pay whether you are self-employed or employed by a company. Tax planning can help to minimize the taxes that you will have to pay.
An insurance plan is important because it helps you to be prepared for the unexpected. Your plan should begin with a determination of your insurance needs. An insurance plan should include more than just your medical insurance and your automobile insurance.
In addition to these basic types of insurance, other types of insurance that you might want to consider include the following:
- Short-term disability insurance
- Long term disability insurance
- Term life or whole life insurance
- Homeowner’s or renter’s insurance
- Long-term care insurance
Even if you are young, it is a good idea for you to carry short- and long term disability insurance. The Council for Disability Awareness reports that more than 25 percent of 20-year-olds will suffer a disability at some time during their working years. Having disability insurance can provide a financial safety net if you suffer a disabling injury or illness that prevents you from working.
Create an estate plan
Estate planning is important regardless of your age. Even if you are in your early 20s, estate planning is still important. For example, if you are a single person in your early 20s and do not have an estate plan in place, your parents will have trouble getting information or making decisions for you if you are in an accident and are incapacitated.
A basic estate plan when you are unmarried and young might include a basic will, a durable financial power of attorney, a durable health care power of attorney, a living will, and an advanced directive. As your situation changes such as when you get married, have a child, get divorced, or suffer the death of a loved one, your estate plan will need to be modified and may become more complex. A n attorney specializing in trusts and estates can advise you on the types of planning documents that you should include in your own estate plan.
Create your personal financial plan by the decade
One good strategy that works for most people is to set financial goals and engage in personal financial planning by the decade. Your financial goals will likely be different during each decade of your adulthood. Here are some basics that you might want to consider.
Financial Plan in Your 20s
During your 20s, your financial goals and plan might include the following:
- Start saving for retirement
- Save an emergency fund
- Eliminate your debt
- Invest money with a more aggressive growth strategy
When you start adulthood on sound financial footing, you will be on your way to financial freedom throughout your life.
Financial Plan in Your 30s
During your 30s, your goals might include the following:
- Budget your money carefully, and stick to your budget
- Eliminate debt
- Make retirement strategies a priority
- Contribute the maximum amounts to your retirement accounts
- Eliminate extraneous expenses
- Invest as much of your after-tax income as you can
Financial Plan in Your 40s
During your 40s, your goals might include the following:
- Eliminate debt
- Save for a house
- Invest in an education plan for your children
- Continue to save as much as possible for retirement
Financial Plan in Your 50s
Even if you are getting started late with your planning, your 50s are still a good time to set some long term financial goals. Some of your financial goals might include the following:
- Contribute the maximum to your retirement accounts and make catch-up contributions
- Stay with your stock investments for the long-term
- Maximize your Roth contributions
- Begin thinking about your future long-term care needs
- Eliminate any debt that you might have
Financial Plan in Your 60s
When you reach your 60s, your retirement strategy will change. This is the decade when you should be more conservative with your investments. If you do not have an estate plan, you will need to engage in estate planning so that you can decide how you want your estate to be handled after you pass away. You should review your life insurance policies and your disability insurance. Your 60s is also a good time to investigate planning for long-term care costs.
Implement, review and revise your plan as things progress and change
After you have identified your goals and have written your plan, you will need to implement it. If you simply write a plan and never implement it, it is not worth any more than the cost of the paper that it is written on. Work towards your goals every day until your plan becomes ingrained in how you approach life.
You should review and revise your plan any time you experience a major change. Some events that should prompt a review of your plan, beneficiary designations, and your estate plan include the following:
- Getting married
- Getting divorced
- Birth of a child
- Adoption of a child
- Blended family
- Death of a loved one
- Catastrophic events
When you treat your savings plan as a living, breathing document, you will be prepared to handle nearly any change that you might experience in your life.
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