What Are Financial Goals and How Do I Set Them?
The idea of “financial goals” can sound intimidating, as if it’s a term that should be reserved for savvy businessmen working on the trading floor on Wall Street. The truth is, though, the definition of financial goals is quite a bit simpler than it sounds — and it applies to everyone.
Financial goals are, in essence, the milestones that you’re trying to get to, financially speaking. It may sound rudimentary, and in a certain sense it is, but it’s an easily overlooked strategy that can have a profound effect on the state of your finances.
Table of Contents
- 0.1 Examples of Financial Goals
- 0.2 Short-Term vs. Mid-Term vs. Long-Term Financial Goals
- 0.3 How to Set Financial Goals
- 1 The Power of Financial Goals
Examples of Financial Goals
While financial goals may be fairly easy to define, it can be difficult to truly understand what the concept looks like in the real world. Before we break down a few things, like short- versus long-term goals and some tips for how to set your own goals, it’s important to make one thing clear: financial goals are incredibly diverse.
There’s no one-size-fits-all template or formula. Everyone’s finances, lifestyles, and life decisions vary dramatically, as do the ways they choose to spend their hard-earned money. With that in mind, here are a few financial goals examples to help you gain a better understanding of just how many different shapes and sizes financial goals can take.
Buying a toy: Let’s start small. Every child has that Lego set, Barbie, or another toy they desperately want as a kid. Often they resort to allowances, picking up extra chores, or mowing lawns in order to save up the money required to buy it. This is the fledgling version of setting a financial goal.
Setting a budget: As you get older, your financial goals mature along with you. One typical goal that most people set at one point or another is a household budget. This is tailored to the household’s lifestyle and needs. For instance, living expenses will almost always be included, but will it be a mortgage or rent? Do you want to live in luxury or have you adopted a minimalist lifestyle? Each budget is different, depending on the person setting them. Your budget is often a reflection of how well you are doing in pursuit of your financial goals.
Paying off debt: Another classic financial goal is paying off debt. This can be anything from a mortgage to a car loan, student loans, credit cards, and more.
Saving for retirement: A common financial goal is saving for retirement. Once again, though, this can vary dramatically. Some utilize 401k or IRA savings plans. Others might invest in their own business or real estate. Still, others take a different approach entirely and create a plan to retire early.
Benefits of Financial Goals
The idea of setting financial goals is one aimed at reconquering your spending and regaining a sense of control over your finances as a whole.
Rather than simply living in a reactionary mindset — responding to financial needs when they arise with little to no plan in place — setting financial goals allows you to genuinely begin to move toward financial freedom. It helps you deal with debt and engage in meaningful activities like giving to charity, saving for retirement, or going on vacation.
Short-Term vs. Mid-Term vs. Long-Term Financial Goals
There are a few different kinds of financial goals that you can set. Typically they can be broken down into three categories: long-term financial goals, mid-term financial goals, and short-term financial goals.
Examples of Short-Term Goals
Typically, short term goals take into consideration the next year or two, and often less time than that. They include things like:
- Creating a budget.
- Sticking to your budget.
- Paying off small debts like credit cards.
- Creating an emergency or “rainy day” fund.
- Saving for vacation.
Examples of Mid-Term Goals
Once your short-term goals are in order, it’s time to move on to slightly bigger fish. Mid-term financial goals are a bit of a gray area on the spectrum, as they deal with things that can often be classified as either short or long-term. Here are a few examples:
- Paying off car loans.
- Getting life insurance.
- Downsizing or changing your lifestyle.
- Improving your credit score.
- Saving for the downpayment on a house.
Examples of Long-Term Goals
Finally, we have long-term goals. These are the goals that will take years and even decades to work towards. They include:
- Paying off your school loans.
- Saving for your child’s college.
- Paying off your mortgage.
- Saving for retirement.
How to Set Financial Goals
It’s difficult to overstate the fact that everyone’s financial goals are going to look different. Be careful not to adopt a “keeping up with the Joneses” mentality as you go about setting your own goals. Instead, here are a few quick tips to get you started:
This is always a good place to begin. For instance, you don’t want to start saving hundreds of dollars a month towards retirement or your child’s college when you’ve maxed out your credit cards.
Begin by taking stock of your financial status. What is the most important thing to address upfront? Is it a short-, mid-, or long-term goal? Make sure to differentiate between wishful thinking and genuine financial goals. In other words, don’t start planning for that vacation first simply because you want it more than that new car you desperately need. Prioritize your needs.
Set a Budget
Budgets are powerful financial tools for so many different reasons. When it comes to financial goals, in particular, taking the time to create a budget allows you to properly understand your financial abilities. It prevents you from spending or investing money you don’t have, and it can provide a road map for how to reach your financial goals.
Another key to gaining some initial momentum is to track your progress. Just because you set a goal doesn’t mean you’ll magically reach it. Make sure to keep tabs on how you’re doing and make adjustments when you find that you’ve wandered from your goals.
The Power of Financial Goals
Learning to set financial goals is one of the most critical skills you can learn. It gives you control over your finances for both the short- and long-term. It allows you to plan for the future, address immediate financial crises, and even work in plans for fun activities like vacations.
When used correctly, financial goals can be the catalyst that can take your finances from a hot mess to a well-oiled machine that is designed to carry you through life for the long haul.
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This post was updated October 23, 2019. It was originally published October 23, 2019.