Financial goal setting is one of the best ways to improve a person’s financial standing and build wealth. No matter your age, it is important to have both short-term and long-term goals. Your financial goal setting process should evaluate where you are financially and where you’d like to be down the line. Goals should be realistic, measurable and achievable and your financial plan should be updated as your life changes.
Determine Your Goals
The first step to creating your financial plan is to determine what your goals are. Although each NYC individual is different, there are many goals that apply to everyone. If you are married, sit down with your spouse in order to jointly spell out your financial goals. It is much easier to work toward financial goals when both spouses are on the same page.
Common goals include:
- Saving money in order to pay for a vacation.
- Purchasing a home.
- Paying off debt.
- Saving for retirement.
- Putting up money for children’s college education.
- Establishing an emergency fund.
Goals should be both long-term and short-term and must be realistic. Financial goal setting that is not based in reality is ineffective and can work against you in the long run.
Set Monetary Goals
Once your goals are established, determine how much money is required to meet each goal. For some of your goals, the process will be simple. For others, you may need the use of calculators or other resources in order to establish an accurate monetary amount. Using the examples above:
- Saving money in order to pay for a vacation: Consider what type of vacation you would like to take, then research to identify how much that vacation will cost.
- Purchasing a home: Having a significant down payment increases the value of the home you can afford and makes you more attractive to lenders. While there are a number of programs that allow buyers to purchase a home with little to no money down, this often comes with a higher interest rate which results in more money being paid out over the life of the loan. Look to accumulate a down payment of at least 10 percent of your target home value.
- Paying off debt: Debt comes in a number of forms including credit cards, personal loans, auto loans, student loans and mortgages. Evaluate the interest rate on all of your debt to determine where you should focus first. You may want to set separate goals based on each debt type, focusing on higher interest rate debt.
- Saving for retirement: Determining how to save for retirement can be complicated. There are a number of things to consider, including your income, age, existing savings and how much money you will need in retirement. There are a number of resources online that enable individuals to estimate how much money they will need to retire comfortably.
- Putting up money for children’s college education: Is college in your children’s future? Do you intend to help them pay for college expenses? Evaluate how much college will cost and how much you would need to save in order to meet your goal. A number of financial calculators can help set this benchmark.
- Establishing an emergency fund: Ideally, you should have at least three months of expenses saved in case of an emergency. This emergency fund should only be used during true emergencies and then be rebuilt as quickly as possible once it is accessed. Individuals that work in volatile industries should consider establishing an emergency fund that equals six months of expenses.
Prioritize Goals and Set Time Limits
The next step in the financial goal setting process is to prioritize each of your financial goals. Which of your goals is most important to you? Are some financial goals contingent on completing others? Once you’ve sorted your list in order of importance, consider how long each goal will take to accomplish. Short-term goals will have shorter durations than long-term goals.
For example, saving for a vacation may take place over a year’s time, while retirement savings will likely take place over a couple of decades. When evaluating how long savings goals will take, be sure to take into account how much interest or capital gains will accumulate as the account ages. Investing funds or saving in interest-bearing accounts will help you to achieve your financial goals faster.
Some goals may have dollar amounts that seem outlandish. If this is the case, for short-term goals you may need to reevaluate how realistic that goal is. However, long-term goals will often come with large price tags. When your rate of return and compounded interest is factored in, these goals will seem much more manageable.
Establish a Plan
Establishing a plan is a crucial step in the financial goal setting process. You know how much money is needed on a monthly basis in order to achieve your goals, now you must set a plan in motion in order to achieve these goals. Evaluate your budget and review your income and expenses. Are your savings goals achievable given your current budget? If not, look for ways to reduce expenses or to increase your income in order to reach your goals. In some instances, you may need to make adjustments to your lifestyle in order to achieve your financial goals. However, taking your lunch to work every day is more palatable when you remind yourself of the vacation you’ll be able to take.
Review Your Goals
Financial goal setting in the NYC area should be an ongoing project. You should review your goals and progress periodically to ensure you are on track, making adjustments when necessary. As your life changes, your financial goals will change as well. This is the ideal time to review your financial plan to ensure your goals are reflective of your life.
A certified financial planner can help you achieve a solid financial plan and assist with the financial goal setting process. Additionally, a financial planner can help you to establish the necessary investment accounts to save for your goals.
