Keeping your finances on track isn’t just about saving money, but rather setting many goals until you ultimately have a blueprint for your financial plan. Whether you’re setting short-term financial goals like saving for a vacation, mid-term financial goals like buying a car that may take a year or two of saving, or long-term financial goals like investing in retirement accounts, the first step is to set them.
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It can feel overwhelming, but there are a few steps you can take to make sure you’re setting realistic goals that you can achieve. Here are some key takeaways:
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Understand your current finances: You have to understand what you’re working with before you can decide what to do with it.
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Know what you want: Big or small, what do you want from your finances? Do you aspire to become a homeowner or just want to take a single vacation?
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Make sure your goals are SMART: Specific, measurable, achievable, relevant and timely. If you set goals that aren’t realistic, you’re setting yourself up to fail.
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Make a plan: Put together a budget and a savings plan — and hold yourself accountable to stick to them.
While it’s hard to conjure extra income out of thin air, there are concrete steps you can take to help move you forward toward each of your financial goals, even if it means setting reduced expectations or just opening a savings account. The bottom line is that the earlier you start planning for what you want to achieve, the more likely you are to do it. Here are four types of financial goals and how you can achieve them.
Financial Goal: Pay Off Debt
Debt is a slippery slope, and unfairly disproportionate for those with low income or no savings. When possible, don’t procrastinate on paying off debts, and set your first financial goal to be paying these in total. Once you get done paying, you can start saving.
Setting Financial Goal: Pay Off Credit Card Debt
When it comes to common financial goals, getting out of credit card debt is right near the top of the list for most Americans — as it should be. Having credit card debt is likely the top cause of why Americans can’t reach their other financial goals.
With oftentimes high double-digit interest rates, credit card debt can rapidly snowball out of control until you’re simply paying off the interest every month without reducing the actual debt. This is why it’s paramount to attack credit card debt aggressively.
Achieving Financial Goal: Pay Off Credit Card Debt
Typically, two methods are cited as the best ways to pay off credit card debt: the debt snowball and the debt avalanche. With the debt snowball, you pay off your smallest credit card balance first, then tackle the next largest after that and so on. With the debt avalanche, you’ll pay off the highest-interest debt first, regardless of its size.
Both methods have pros and cons, but as long as you create a plan and stick to it, you’ll make progress against your credit card debt. To give you a head start, try to boost your savings even by an extra $50 or $100 per month and put it towards your credit card debt. You could also temporarily divert your other savings, such as your retirement plan contributions, to help prevent your credit card debt from spiraling out of control.
Setting Financial Goal: Pay Off Student Loans
Paying off student debt is somewhat similar to paying credit card debt, although interest rates and payment terms are often more generous. In the current environment, however, you’ve got a friend behind you in the form of legislative action.
Achieving Financial Goal: Pay Off Student Loans
For now, the best course of action is likely to suspend your payments as long as you can to fund other financial obligations, while keeping your eye out for additional legislative action that may reduce or even eliminate your student debt.
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Financial Goal: Build an Emergency Fund
Financial shocks and unexpected expenses happen. When they do, it is good to have money set aside specifically for this reason so as to not hugely impact your finances or send you spiraling into debt.
Setting Financial Goal: Create an Emergency Fund
An emergency fund is essentially a separate savings account and an easily accessible cash reserve you have set up in case of medical or insurance bills, car repairs, job loss or other issues outside your typical monthly budget.
Achieving Financial Goal: Create an Emergency Fund
One good way to start saving or create an emergency fund is to budget out your expenses in percentages. For example, the 50/30/20 rule of budgeting advises people to save 20% of their income every month. That leaves 50% for needs, including essentials like rent and food. The remaining 30% of your income is for discretionary spending. That 20% you’re saving can be put directly into your separate emergency fund.
You could also try a money-saving challenge, like saving all your spare change, and depositing what you save straight into your emergency fund account.
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Financial Goal: Buy a Home
Buying a home is likely the biggest investment you will make in your entire life. Even for the financially savvy or those earning lots of money, it takes work and planning to make that dream come true.
Setting Financial Goal: Buying a Home
The biggest step for most is saving enough for a down payment. Although you can put up nearly any type of down payment on some homes, it’s best to raise at least 20% for a number of reasons.
First, you won’t have to pay extra on your mortgage in the form of private mortgage insurance, or PMI. Next, you will immediately have equity in your house and won’t likely have to worry about being underwater.
Achieving Financial Goal: Buying a Home
Starting a dedicated savings plan for a home — and charting out how much income you will need to realistically afford a monthly mortgage payment — is a good step toward achieving this goal. Once you know how much you need to save for the type of house you want, you’ll be able to make a plan for how long it will take and any extra saving and budgeting you can do.
Financial Goal: Build Your Retirement Savings
Saving for retirement is a lifelong endeavor, and it may very well be the most important financial goal you’ll have. Fortunately, there are many opportunities you’ll have to save for retirement, and it’s important to take advantage of them as soon as possible.
Setting Financial Goal: Saving for Retirement
What you save now in the short term can greatly impact your life in the long term. Retirement savings are essentially the money you will have to live out the rest of your life, so setting this goal today is a great first step for tomorrow.
Achieving Financial Goal: Saving for Retirement
If you work for a medium-to-large company, you likely have access to a 401(k) plan, which can be one of the best investments you’ll ever make. Most employers match at least a portion of employee contributions, essentially pouring free money into your account every year.
If you don’t have access to a 401(k) plan, start an IRA as early as possible and contribute as much as you can. The true key to reaching the financial goal of a retirement nest egg is to start as early as possible. If you can begin at age 20 with as little as $100 per month, at a 10% annual return, you’ll have nearly $1.3 million by the time you reach age 67.
Final Take To GO: Why You Should Set Financial Goals
The point of setting your financial goals is to be financially secure in your future. Not only will setting and achieving financial goals improve your lifestyle, but it also becomes a domino effect of other financial improvements. For example, starting an emergency fund of cash you can dip into for the unexpected keeps you from having to go into credit card debt, which improves your credit score, which helps you secure a loan for a new home.
When it comes to achieving your financial goals, the most important way you can set yourself up is to have a plan and stick to it. It’s keeping yourself accountable for following your plan that gets harder. Here are a few strategies you can try:
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Visual reminders: Put a picture of what you’re saving for in your wallet, in front of your credit card, to stop yourself from impulse spending. Or put a chart or graph on your desk or fridge and fill it in as you go, so you have a clear representation of your goal in easy view.
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Automate savings: Set up direct deposit from your paycheck to send a specific amount into your savings account every time you get paid, or set up automatic transfers from your checking into your savings every month.
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Try the buddy system: If you have a friend or family member who is also working toward financial goals — whether they’re the same as yours or not — you can keep each other on track with regular check-ins.
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This article originally appeared on GOBankingRates.com: Setting Financial Goals: How To Create and Achieve Them
