Why Goal Setting Important For Financial Planning

Setting Financial Goals and Objectives

Finances are something that most of us don’t want to talk about. They are also something that most schools don’t teach. Properly managing your finances can make the difference between long term success and not having enough money when it comes time to retire. Part of properly managing your money is setting financial goals and objects.

Let’s take a minute to discuss the difference between goals and objectives. A goal is a long-term point that you want to achieve with your finances. A good example of a goal is to have 1.5 million dollars saved by the time you retire. This may seem like a lot of money if you look at it in terms of the goal.

However, when you look at it in terms of your objectives, you will have a plan to get there. Each object is a milestone on your way to the goal. So, your first objective in the example might be to have 10,000 in your primary retirement account. After that your next objective might be to have 5,000 more in two separate accounts.

Why Goal Setting Is Important For Your Financial Planning

Now that you have an idea of what a goal is and what an objective is we are going to take a brief look at Why Goal Setting Important For Financial Planning? Often times a people make only a very loose plan for their financial future. This gives them no timeline or specific plan on how they are going to get there. What happens at that point is that they get lost in what they are doing and do not make it to their end goals.

Your goals and objects are what guide you along on your financial growth. They give you a path that will help to ensure each step is followed. Goals also work as a motivation for when you are feeling less enthusiastic or when you need something to push you to success.

You will find that goals also give you priorities and accountability. Two important factors when trying to accomplish anything in life. Without goals you are just kind of placing money wherever feels right in the moment.

How To Set Your Financial Goals

Setting financial goals isn’t as simple as saying that you want to have a certain amount in your account by the time you retire. Instead, you want to set specific goals with ways to achieve them. Your goals should also take into account your needs and finances.

The first step you should work on when setting financial goals is not actually the goals themselves. You want to start by analyzing all of your income and spending. Take into account every time money comes into your account and every time it leaves. Here are a few questions to ask yourself when trying to analyze your finances:

  • How much are you spending on food?
  • How much are you spending on gas?
  • How much are you paying for rent?
  • What are your credit card payments?
  • What subscriptions/small expenses do you have (i.e. Netflix, Hulu)?
  • Do you have any additional sources of income?

Take all of the answers to those questions and any thing that is specific to your situation and write it down. You want to have something to reference as you start making your financial goals.

While saving and accumulating money you want to make sure that you have enough money to live. In order to achieve your goals and have enough money you might need there might need to be changes in how you live. Cutting unnecessary costs can help your financial future greatly.

One way to cut costs is to remove small subscriptions such as Hulu and Netflix so that you only have one service. This will help you to maximize your savings and pay of debt quicker. Then you can go back to subscribing to these services.

Your financial goals will need to be tailored to your specific needs and your current financial status. That being said, there are some general goals that everyone should shoot for.

These are some of the most important generic goals that everyone should work on:

  • Establishing an Emergency Savings
  • Payoff Any Debt
  • Save For Retirement
  • Save For Specific Life Events (i.e. weddings, house purchases, and cars)

Goals should include both short-term and long-term goals. This will address immediate needs such as emergency money and insurance. Paying off your debts would also fall under a short-term goal. The length of a long-term goal is only about 2 years.

Long-term goals go to secure your future.A long-term goal would be one that is 5 or more years out. Your long-term goals include things such as saving for a major purchase, preparing for retirement, and preparing for a child’s education. Both types of goals will work together to ensure that you have enough money when you need it.

Some important questions to ask when developing your goals are:

  • What do you want to achieve/what is your overall goal?
  • How much do you need to spend every month versus how much do you like to spend?
  • When will you need each stage?
  • When do you want to retire?
  • How are you going to achieve each step?

The idea behind this is that you are going to establish a set of financial goals based on your current situation. Each goal should work to cover a different part of your end financial goal. Together the goals form a comprehensive plan to drive you towards success.

Goal Setting Example

When setting your goals, you should come up with a comprehensive plan of action that addresses each goal and how you will get there. This cannot be something that you keep in your head. Preferably it is a document that you are going to write up and format to make it clear what each stage is.

Each goal will be written down as specifically as possible, as will the objects. This will help you to know each stage as you continue on and remind you of what needs to be done.

During the goal setting process you want

In order to better help you with your goal setting we are going to look at an example of a good set of goals. The list will be in order of priority and address as much detail as possible. You can use this list to help you along the way but ensure to tailor it to your exact needs.

Step One: Establishing an Emergency Savings/Fund

Very few things in life are guaranteed. That is why it is always good to be prepared for the unknown. Almost all experts say that one of your first priorities should be to establish an emergency fund. You don’t want to build the fund up to slowly but at the same time you should ensure that it is there quick enough that you have it when you need it.

A good goal for an emergency savings fund is to save between $50 and $100 a month, depending on your income. Set a timeframe to have you fund established by. This all depends on how much you want to have saved up but a good timeframe to put large amounts of money into your emergency savings is about 6-12 months.

Paying off debt is typically a first priority for many people. However, you can make minimum payments while you establish your emergency fund. If you pay off your debt and an emergency arises, without an emergency fund you will just end up in debt again.

Once you have met your short-term goal for your emergency fund, it doesn’t hurt to have a long-term goal and contribute smaller amounts every month.

Step Two: Life Insurance, Medical Insurance, and Accident Insurance

Financial well-being isn’t all about savings and income. It is also about protecting the assets you have. Your number one asset is yourself and you need to protect that. A common second goal is to establish life insurance and accident insurance.

Those who do not have medical insurance should also look into getting that now. The second goal goes alongside the first one in that they are immediate goals. Ones that should be started on as soon as your planning is done.

Step Three: Start A Retirement Account

If your employer has a retirement account, especially a matching one, then you should start contributing towards that. Typically, it is a good idea to max out their matching so that you an get the most free money from them as possible. Start with employer matching as soon as you can.

For all other retirement accounts, you want to start in about 1-2 months. Give yourself some time to make a little money for your emergency fund, some savings, and time to do your research. When it comes to setting up a retirement plan, you want to have your money diversified so that all of your eggs aren’t in one place.

We recommend splitting your money into four different mutual funds evenly. This gives you a safety net should something happen to one of the plans. However, with good research, your plans should start earning you money for retirement.

You will have to set your goal for how much you want to end up with in your retirement account and how much you want to set aside every month. It is typically a good idea to put in as much as you can afford to.

Step Four: Save For Important Expenditures

Once you have your emergency fund, insurance, and retirement setup, you can start saving money for important expenditures. If it is something you are going to need the money for soon, deposit the money into a savings account. Set a goal for when you want to have that money ready.

For longer term savings such as buying a house in 10-20 years or getting married in 5-10 years, you can put your saved up money into a mutual fund (such as one of your retirement funds) as an extra investment every month until you have enough saved up. That way your money can earn you more in the process.

A Quick Chart

In our savings example we covered a lot of information in multiple paragraphs of text. Now we are going to condense it down into a planning chart. You can use something similar as you are planning out your goals.

Priority Goal Details When To Start
1 Emergency Fund $50-$100/Per month Immediately until you meet your savings goal
2 Insurance (life, medical, accident) Sign up for an account Now
3 Retirement Plan 4 mutual funds evenly distributed In 1-2 months
4 Important Expenditures Savings or mutual funds In 2+ months depending on your funds

 

A Note About The Permanence Of Goals

You should never discard a goal for no reason. However, there may be times when you need to change your goals as your life changes. A good example of this is when you lose a job or get a new job. If you start making more money your goals should increase. After a lost job, you want your goals to be modified to reflect the loss of income.

It is important to take a look at your goals regularly. Twice or four times a year is a good timeframe. This allows you to make sure that you are on track and that nothing has changed. If you find that your goals are no longer adequate or something needs to be changed, it is important to start back at the beginning and analyze your financial status and go over your goals again as if it is the first time you are setting them.

Most people will find that their original goals are on point though and will be able to continue on with their exist goals and objectives.

Goal setting is a financial planning key point. In order to succeed in getting ready for retirement and your other financial needs, you need to know what you are shooting for and how you are going to get there. Make sure to set aside the time to make goals and write them down so you can keep track of your progress.

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