As an investment app, one of FLIT’s key objectives is to help people grow their wealth and reach their financial goals. The first step in that journey is disclosing what exactly your financial goals are. To invest for a better future, you have to know what you aspire that future to look like. While it may sound simple, pondering your future to determine what you will need money for can also be quite overwhelming. For some it means enough money to get married in the next two years. For others it means looking to purchase a house. For many it means saving for retirement. There are no right answers for what your goals should be, but there are a few key concepts that can be help to develop them.
Why are goals important?
Most people don’t plan to fail; they fail to plan.
John L. Beckley
Making financial goals inspires healthier spending and saving habits and encourages you to handle your entire financial life better. Goal setting is the root of creating a financial plan and allows you to measure and monitor your savings progress. It also keeps you more accountable to the financial plan you make as you keep your end goals in mind. According to Lincoln Financial Group, 83% of Americans who set financial goals feel better about their finances after one year.
Take stock of where you stand
Before ever making a financial goal, it is important to survey where you stand financially in life. That means surveying the in-flow and out-flow. How much are you making and what are you spending it on? Categorize you’re spending for a complete understanding of where your most financial energy is going.
Figuring out what you spend money on currently is the basis for creating a budget that reflects how you live. It also may give you a better idea of what you care to have money for in the future and point out areas where you may be able to cut back on spending.
Find out what you want
While some specific goals are important from a need-based perspective for all people (i.e., retirement) individual financial goals and the weight of their importance to you are entirely personal. Most people need to begin saving for retirement, but not everyone wants to own a car eventually. No two person’s savings plans are the same and that’s because figuring out what your financial goals are at its core is life planning. The traditional and somewhat cliché practice of envisioning where you want to be two, five and ten years, from now is all part of developing your financial objectives.
Don’t let this process overwhelm you, put the money aside (figuratively) for a moment and think about what is important to you to have in the coming years and why you want it. Then, choose a general goal that is important to you, success? Happiness? Relaxation? Try to determine what that may look like for you.
With that overarching picture of your future in mind, the next step is to develop things on a more specific level. Deciding what you need to save for is a lot easier when your break it down into sections. Bucketing is a term used to categorize our financial goals into separate themes or ‘buckets’. You can choose how you want to rank your goals but a good way to start developing them is by thinking of them through time frames of short-term, mid-term and long-term.
Short-term goals: under a year – 3 years
The recommendation for short-term goals is that anything you want in less than three years should be put into a savings account. Investing your money is more of a long game, with unpredictable ebbs and flows in the short term. Advertisements or people telling you otherwise and broadcasting get-rich-quick investing scenarios can be tempting but are probably a scam, putting your money into a savings account is the best way to work toward short-term goals.
Like all goals, your short-term goals are totally up to you. However, if you are entirely unsure of what you may need or want in the short-term, here are some recommended goals in order to gain more financial stability…
- Make a rainy-day fund: A little safety net of money just in case of any unexpected costs you might suddenly incur. An emergency fund is often thought of as the base of your financial pyramid and a general rule of thumb is that it should be 2-6 months of your monthly expenses.
- Pay off high-interest debt: If you are currently living with high-interest debt such as credit card debt then this is considered a short-term priority.
A short-term goal may also be a vacation you are looking to take or other large purchase you are looking to make in the near future.
Mid-term & long-term goals
These are the goals that you can start investing for as they are over the three-year mark. Mid-term goals are categorized as those that fall between five to ten years in the future.
Long-term goals on the other hand are thought of as anything that is over ten years in the future. What comes to mind for most when they think of saving for something that far down the line is retirement. You may have a plan for when you want to retire and how much money you believe you will need by that point. Even if you aren’t sure of those things yet, the earlier you begin putting money toward a retirement fund the better.
A general rule of thumb surrounding retirement as well as other mid-term and long-term savings goals is the recommendation that you save 15-20% of your gross income to be prepared. People often believe that they will spend a lot less during retirement than they do in their peak spending years. However, this is a false idea. In reality spending during retirement should be thought of as 90% of your peak spending.
Categorize your goals
You can make buckets inside of your buckets! Deciding your goals by thinking short-term, mid-term and long-term helps break down the goal-setting process and means you already have a loose outline of when you want to complete them. However, this is not the only way you can or should categorize. It is helpful to make your goals a little more concrete by assigning them a more exact target date that can change over time but provides you a bit more purpose in saving.
Taking stock of each goal and placing it into a priority bucket (is this goal a need, a want or a luxury aspiration?) can be helpful when unexpected challenges arise, and you need to get flexible.
When deciding on and categorizing your goals, remember to be both realistic and conservative. This is where having a good idea of where you stand financially comes in handy. The idea is to promote growth by working toward something. It’s okay to dream big, you should push some of the larger accomplishments further down the line.
Write down your goals
Have you been getting all this down? If not, definitely start. Writing down your goals can help you to clarify what exactly it is that you want. Beyond that, it is proven to help you work toward them. One study found that those who write down their goals are 42% more likely to achieve them. It is a good way to stay organized, focused and accountable.
While accountability and purpose are important, life is unpredictable and nothing you plan for now is guaranteed to come to fruition. What you want and when you want it may change throughout time just as your ability to get it might shift. For example, when saving for a financial goal it is suggested that whatever you are saving for generally will end up being 15-20% more expensive than what you have intended.
Change is more often than not unexpected. Don’t worry if you feel like you are not on the perfect track. It’s okay if when you are saving you are not projected to have 100% of your necessary funds by your goal date—you can mix and match with savings and optimism that your future self will have some out-of-pocket spending abilities. So, keep in mind that financial goals are not set in stone and it is normal to revise them over time constantly.