Set and Prioritize Financial Goals
If you don’t take time to set financial goals, you tend to deal with issues
haphazardly, addressing whatever happens to bubble up at the time. For
example, without a plan, a leaky roof can easily cause vacation prospects to
slip away; however, proper goal-setting can allow you to visit Niagara Falls
without ending up with your own personal waterfall in the living room.
Consider the following reasons to invest some time in setting financial goals:
- You achieve financial peace of mind.
- You gain the power of living within your means.
- Time is your friend, allowing you to put away less money over longer
periods of time.
- Your goals are free to change over time.
This section helps you put your goals in place and start working toward
them.
Get Started
Although setting personal financial goals doesn’t require an advanced
degree, it does take some consideration (and maybe a cup of coffee). Most
people have limited resources and have to be honest about what’s most
important in life. Become your own Personal Finance Project Manager, and
start by getting it all down on paper:
1. Make a list of all your goals.
Write it all down — new refrigerator, new roof, new car, vacations and
travel, retirement, college funding, and so on. Don’t forget the goals that
you take for granted. For instance, if you have a five-year loan for your
car, you committed to the goal of owning the car at the end of five years
by taking out that loan. Take the time you need to make sure your list is
complete.
2. Attach a price tag to each goal.
You need to know how much each goal costs in light of your budget and
other goals. Do this before prioritizing, because sometimes the cost of a
goal becomes a deciding factor in setting those priorities.
Short-term goals are easier to address because the costs are much more
predictable. For example, if you’re hoping to buy a new car outright in
two years, you can be pretty sure that the current cost of the vehicle,
plus a reasonable adjustment for two years of inflation, will be a realistic
estimate.
For longer-term goals, such as retirement and college savings, setting a
price tag can be tricky. Check out the college cost calculator at savingforcollege.
com and see Strategy #54 and Strategy #55 for good information
about accumulating adequate funds for retirement.
3. Prioritize your goals.
When you have a good feel for the cost of your goals, list them in order
of importance to you. Prioritizing brings a great deal of perspective to
the process. You may find that some goals become unimportant enough
that you remove them altogether. Or you may make some important lifestyle
decisions, such as buying a used car instead of a new one, in order
to achieve a goal more meaningful to you. Don’t be discouraged by cost
(for example, the cost of retirement) — just realize that it’s important to
get planning now so you can consistently chip away at it over time.
4. Assign a tentative timetable to your goals and visualize how much
they’ll cost at various points in your life.
Consider the scale of a big, long-term goal, such as retirement, against
smaller goals, such as vehicle purchases and travel. And don’t forget the
effect of inflation over time.
Compare Short-Term and
Long-Term Goals
There are some big differences in how you handle and invest for short-term
and long-term goals. This section lays them out for you.
Short-term goals
Generally, you want to achieve short-term goals in the next five years. They
may include the following:
- Saving for a down payment on a new home
- Paying off credit card debt
- Buying a car
- Taking a vacation
Keep your savings for short-term goals in liquid investments. Liquid investments
can quickly and easily be converted to cash; examples include
- Savings accounts
- Money market accounts or mutual funds
- Short-term CDs with staggered maturities
You don’t want to invest in anything that may significantly drop in value,
such as an individual stock, leaving you with less cash at the very time you
need it.
Leave some money in your emergency cash reserves. The money you’re
directing toward short-term goals should be in addition to your rainy-day
fund, an in-case-of-emergency account that can support you for three to six
months. Like savings for short-term goals, your emergency cash reserves
should be invested in highly liquid, easily accessible investments. (See
Strategy #9 to make sure you’re covered.)
