What is your most important breath of air? Answer: the next one.
The future doesn’t really matter if you cannot survive long enough to see it. But once you learn how to breathe, the sky is the limit. I like to keep this in mind whenever I get overwhelmed in my day-to-day; it helps me to prioritize my most immediate need first and worry about the things that can happen after the most pressing things are completed. I think this same concept applies when choosing your own personal financial goals.
Setting clear financial goals is an essential step in building a solid financial plan. But at the beginning of the goal setting process, it can become overwhelming when deciding what to work towards first. Tackle an outstanding debt? Do I build up my emergency fund? Do I save for retirement?
Remember the next breath. Think immediate needs first, then further out into the future. Below, I will illustrate a structured approach to help you decide on the goals that are right for you.
Assess Your Current Financial Situation
Income vs. Expenses
Evaluate your income, expenses, and savings to understand where you stand financially. Ideally, you want to have more money coming in than going out on a monthly basis. If you are spending more money than you are making, then we have a problem.
For that problem, there are two solutions. The first would be to spend less money. Trying to decrease your monthly spending is a great exercise, but at the end of the day, it will only get you so far. There are necessary expenses that we all have such as shelter, utilities, groceries, and insurance. You do need to have money coming in so that you can afford to live.
That leads to the second solution of making more money. But be careful, as we make more money that does not give you the right to spend more, especially if you have had troubles with overspending in the past. Depending on what kind of job that you have, you might get a raise every so often. You can increase your chances of getting a raise by thinking like the owner of your business or manager. I would ask myself, what can I do that adds value to the business from my current position? Honestly, you could also ask a supervisor, and they could give you some things to work on or additional responsibilities to pick up. I am a firm believer that value will be rewarded. If you don’t feel that you are being rewarded for your value, you have every right to look for other opportunities or have the conversation with management.
When taking a measurement of spending, I like to look at 6 months to a year of bank transactions. If you look at a monthly interval, then there is a tendency to write off some expenses as one time expenses. Over longer periods of time, you find that those one-time expenses average out to give you your true monthly expenditure. Once you have a total of your expected income and expenses, you should then have the amount remaining that you can apply towards your financial goals.
Debts
Consider any debts you have, such as student loans, credit cards, or a mortgage. A key thing to know about your debts is to understand the rate of interest associated with each loan. Credit cards can have interest rates of over 20%. That is a very high rate of interest that can be a drag on anyone who is wanting to grow their wealth. I would say that any debt that is more than 10% would have a priority over any future goals automatically. For other lower interest debts such as mortgages, it would be best to talk with a financial advisor to get their take on your situation.
Net Worth
Calculate your net worth by subtracting your liabilities from your assets. Tracking your net worth over time can be helpful to see if you are growing your assets and shrinking your debts. It is another measurement of financial health. If you are doing things correctly, you should see your net worth increase over time.
Define Short-, Medium-, and Long-Term Goals
Below is a list of some example goals that you could choose. But it is up to you on what you want to do with your financial future. I would encourage everyone to not focus solely on one single goal unless your credit card debt is out of control. Aside from that, it is best to chip away at each of these goals slowly.
Short-Term Goals (1-3 years)
- Pay off high-interest debt (e.g., credit card debt)
- Build an emergency fund (3-6 months of living expenses)
- Save for a major purchase (e.g., a vacation, home improvement)
Medium-Term Goals (3-7 years)
- Save for a down payment on a home or investment property.
- Increase retirement contributions.
- Plan for a life event (e.g., wedding, children’s education).
Long-Term Goals (7+ years)
- Plan for retirement.
- Pay off your mortgage.
- Achieve financial independence or early retirement (if desired).
Prioritize Goals
Money is a limited resource. This means that we must prioritize which goals we go after and how aggressively we go after them. I have touched a bit on prioritization of your goals but consider the following factors when prioritizing.
Urgency
Some goals, like an emergency fund or paying off high-interest debt, may need to come first. High interest debt can derail a financial plan and make it very difficult to get ahead. Also, important would be having an emergency fund for any big expenses that come up. Without an emergency fund, you may be forced to pay for the large expense with a credit card, starting you back at the beginning of the process.
Financial Impact
Focus on goals that have a significant long-term impact, like saving for retirement. Time is your greatest asset when saving for retirement. So, it is important to be tackling this goal during your working years and not waiting until the last 10 to 15 years before you stop working.
Personal Values
Align your financial goals with what matters most to you, whether it’s security, freedom, family, or experiences. Life is all about a healthy balance. It is important to choose goals that allow you to experience your life, but also set yourself up for future success.
Use the SMART Framework
Below is the SMART framework for goal setting. SMART goals do take some time to put together, but the framework gives wonderful structure to make sure that your goals are the most effective.
- Specific: What exactly do you want to achieve?
- Measurable: How will you track progress?
- Achievable: Is the goal realistic?
- Relevant: Does this align with your long-term objectives?
- Time-bound: What is your deadline?
As a financial advisor, I am all about making goals measurable and achievable. For financial goals, we can look at the income and expense portion of this article. Let’s say that you have $10,000 in monthly net income and $8,000 in monthly expenses.
This leaves a monthly net income surplus of $2,000. If you have a list of three goals, then you can divvy up the monthly surplus amongst that list of goals and come up with an anticipated timeline of when each goal should be completed. Of that $2,000, lets say that need to replenish our emergency fund by $12,000. So, we allocate $1,000 per month to the emergency fund. If all goes according to plan, then it should take a year to achieve. Next, we want to maximize Roth contributions for this year. The contribution limit for 2024 is $7,000. Broken up monthly that comes out to $583.33. Finally, we want to save up for a nice vacation that costs $10,000. We have $416.67 left of the $2,000 net monthly surplus.
Assuming no growth of savings, which would be a conservative way to plan, it would take 24 months to save up $10,000. This would assume that you are 100% efficient with your saving and there is always $2,000 in net monthly income at the end of the month. While that would be a great target to shoot for, life can happen and impact your goals. We know that this can happen, so when it does, do not feel like all is lost. Just keep your head down and keep moving forward.
Review and Adjust Regularly
Your financial situation will change over time. Periodically review your goals to ensure they still align with your circumstances and adjust as needed. In the best case, you may achieve some of your goals. Then it is time to start the process over again and set some new goals! A monthly review of your goals is great to get an update on the progress that you are making. Quarterly or semiannually, you can see if those goals are still something that is relevant to you and what you want to accomplish. By using this structured approach, you can create a clear path for reaching your financial goals while balancing your current needs and long-term aspirations.
Are you looking to start selecting and progressing toward your financial goals? Get in touch with an HFG Trust Financial Advisor today or schedule a meeting to review your goals begin the process of achieving them today.
Brent Schafer, CFP®, Financial Advisor
