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Saving and Financial Forecasting:. The Power of Planning: Setting Your Financial Goals
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The Power of Planning: Setting Your Financial Goals • Setting financial goals is a smart choice and can be very rewarding. When you set a financial goal, you define what you want and develop a plan for achieving it. Instead of wandering aimlessly, you have something to strive for and a clear path for getting there. After all, 10 years from now you don’t want to be laden with buyer’s remorse wondering where all your money went, do you?
Setting a financial goal is just like setting a personal goal. For example, if you decide you want to be an architect, you develop a plan of action that will get you there. First, you research college architecture programs. You decide which ones are best for you, apply, enroll and get the education you need. After you graduate, you search for internships at architecture firms and work up the hours to get your architect’s license. Along the way, you envision yourself in a rewarding job where you develop and draft beautiful buildings.
Financial goals are no different. If you want to buy a car, you must come up with a plan for paying for it. This might mean having to make some trade-offs. You decide where you can cut back expenses, how much money you are able to save each month, and set a goal for how long it will take you to save up for a down payment. You picture yourself driving your new wheels to motivate you to stick to your plan.
10 steps to reaching your financial goals: • Define your goals – What do you want?. Here are some common financial goals: • Pay off a credit card or loan • Create an emergency fund • Contribute to a retirement plan • Save for a down payment on a home or for a large purchase such as a car, boat, big screen TV • Save up for college • Start up your own business • Write down your goals. When you write down your goals, you are more likely to achieve them. It also helps you assess what you really want. • Prioritize. You may have a lot of goals. After you write them down, prioritize them. This will help develop a plan of action you can stick to. • Be specific. Define an amount, a time frame, and what the money is for in your financial goal. Example: “I would like save up $20,000 within the next 10 years for a down payment on a house.” • Be realistic. Set a goal that is reasonably attainable. You can always revise your goal in the future depending on how you are doing with your plan. • Develop a plan of action. After you define and prioritize your goals, come up with a plan on how to meet your goals by working with your monthly budget. For example, if you want to save $1,000 for a new TV over the next year, see if you are able to set aside $84 a month towards it. If so, after 12 months you will have the $1,000 you need to make the purchase plus interest you earned on your savings. • Don’t forget interest. If your goal is to save a certain amount of money, open an account that will allow you to earn the highest rate of interest and your savings will increase faster. If your goal is to pay something off, keep in mind you are paying interest on that item. Many experts advise that you put any extra money you have for paying off loans and credit cards to the item with the highest interest rate first. • Set milestones. If you want to save $5,000 in the next five years, set short term goals along the way. You may decide that during the first year, you will save $700, the second $800, the third $1,000, and so on. • Commit yourself to your goals. You will probably have to make some trade-offs in order to meet your financial goals. Maybe you want to go to Italy for a week and you also want to save for a house. Weigh the importance of each goal and commit to meeting your milestones. Many times, you can still reach both goals – it may just take a little longer. • Review your progress. Periodically check to see how you are doing with meeting your financial goals. Make adjustments to your plan as necessary.
There are a lot of ways to spread your money out. Where do you focus when it comes to financial goals? • According to a recent on-line poll, men were asked what their financial goals were; here is a summary of the top five financial goals, according to the men surveyed.
Top 5 Financial Goals • No.5 Pay off your consumer debt • Houses need to be built on firm foundations, and you can’t build a strong financial life if you’re sinking in a swamp of consumer debt. By “consumer debt” we mean any debt that is used to fund consumption (buying electronic toys) and not investment (real estate). Mainly that means credit card debt, but it can also be a car note for that ride you knew you couldn’t afford. If your financial liabilities outweigh your assets, then your goal is to get back to zero.To get there:-Have a realistic timetable: You’re not going to pay off $10,000 in credit card debt in two months. But you’re not going to pay it off in 100 years if you only make the minimum payment. So split the difference. Decide what the light at the end of the tunnel should be and make that your goal. Unless you’re buried under a mountain of debt, try to make it less than five years.-Make steady progress: Sometimes people drop their diets or exercise regimes because they mess up one time. Realize that you’re going to mess up. Stuff happens. But don’t blow off your goal if you have a bad month. Stay focused on the big picture.-Work a little harder: If you have to, get a part-time job. Work overtime if your job allows for it. It’s not fun and nobody wants to do it, but you’ll feel a lot better about yourself if you start seeing your debts go down.
Top 5 Financial Goals • No.4 Build an emergency fund • Nothing can send you back to square one quicker than an unforeseen incident like losing your job, getting hurt, getting in an accident, etc. If one of those things happens, and you don’t have cash in the bank in the form of an emergency fund, then you’re going to find yourself buried in debt again.Most financial planners will tell you to have three to six months of living expenses saved. That sounds like a lot, especially if you have zero months of living expenses saved right now. But you don’t build up savings overnight. Set up a separate savings account with your bank or an online site like ING Direct that will debit a certain amount out of your checking account each month. The account should be “safe.” You’re looking for the kind of safety you get with a money market fund or an FDIC-insured account. If it pays a little interest, that’s great, but you’re not looking to get rich off this money. This is your rainy-day fund and if there’s one thing that’s certain in life besides death and taxes, it’s that rainy days come when you’re all set to play outside.
Top 5 Financial Goals • No.3 Amass equity in real estate • Record foreclosures over the past couple of years have made people think twice about buying a home. The fact that many people lost their shirts in real estate means that real estate is an extremely risky investment, right?Well, it can be. It’s risky if you don’t manage it the right way. People lost money because they got in way over their heads on their initial mortgages (they bought too much house) or they saw the equity in their home as an ATM, started borrowing on it and ran up a mountain of debt that way.So when it comes time to invest in real estate, don’t try to play “flip that house.” Real estate has always been a great long-term investment and, unlike a mutual fund, it has a practical use as well. After all, you can’t live in a mutual fund.Make sure you go in with your eyes wide open if you do buy. There’s more to owning a home then just the mortgage. You’ll have additional insurance payments, taxes and maintenance. But if you can fit all of that in your budget and get into a home that makes sense for you today, the growth in the real estate market will pay off for you tomorrow.
Top 5 Financial Goals • No.2 Put 10% of your pretax income away for the long-term • People hate saving for retirement for two reasons:1- They hate putting money into an account that they won’t get to spend for a very long time, and2- They hate to admit that someday they will retire and have to put on white shoes and drive 10 miles below the speed limit to the early-bird special at the diner.So don’t call it retirement. Just call it saving for the long-term. Whatever you want to call it, it’s a regular deposit you need to make in an account that will hopefully keep you from eating cat food in your golden years.If you have a 401(k) at work and it has a match program, then you’ll want to do at least enough to get that match. Then try to increase it a little bit each year. If you don’t have a retirement plan at work, then call one of the big mutual fund companies (Vanguard, Fidelity, T. Rowe Price, etc.) and ask about setting up an IRA or Roth IRA. And don’t be put off by the subpar performance of the stock market over the past 10 years. You’re not looking to speculate or make a quick buck. You’re looking to build wealth over a long period of time. A diversified portfolio of stock and bond mutual funds is still your easiest, best hope to do so.
Top 5 Financial Goals • No.1 Insure against risk • If you can become debt-free, build up short-term and long-term savings and buy your own home, then congratulations are in order. You are better off than roughly 98% of the people in the world. Your final challenge, then, is to make sure you stay that way. So be aware of the catastrophes that can bring you down.-If you get hurt, you can’t work. And if you can’t work you can’t earn. So if you don’t have disability insurance through your employer (short-term and long-term), look into buying some.-If you have a wife and kids and they depend on your income and you die, they’re going to be up a creek. So make sure you have adequate life insurance.-If you need a car to get to work and you total it, then you’re going to need another car. So make sure you have enough car insurance. (If you have a car loan, there are usually minimum amounts of car insurance that you’ll have to get. But if your car is paid for, you’ll need to make sure you have comprehensive coverage).Insurance is another “not so fun” thing to spend money on. And we all love to spend money on things that are fun. That’s called financial freedom and we all want to get there. Follow these five steps, and you’ll get there.
