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A Comprehensive Guide on How to Set Financial Goals

A Comprehensive Guide on How to Set Financial Goals

Learning how to set financial goals is an important element of financial literacy and well being. The best goals are ones that are practical and aspirational. It can be challenging to walk that line, but doing so will help you with financial planning and meeting your financial goals.

Leaders Credit Union members sometimes ask us for help with financial goal-setting and we’re happy to provide guidance where we can. Whatever your aspirations are, you can use this guide for help in setting financial goals and achieving financial success.

How Can I Make Sure My Financial Goals Are Realistic?

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The financial goals you set should always be realistic. The best way to be sure they are is to understand and set SMART goals. A SMART goal is one that is all of the following things:

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time-Bound

An example of a goal that isn’t SMART would be a goal to increase your savings. The lack of specificity and other details make it too general to be an effective goal.

By contrast, a specific and SMART goal would be something like this:

I will transfer 10% of my take-home pay into a high-yield savings account every pay period, with the goal to have a six-month emergency fund by December 1, 2024.

This goal is specific because it mentions exactly how much money you’ll save each pay period and what the goal is. It’s measurable because you’ll know whether you’re saving enough, and you can make it achievable by setting a percentage goal that works with your budget. It’s relevant because it’s a good idea for everybody to have an emergency fund and time-bound because you’ve set an end date to reach your goal.

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How Do I Start Setting My Financial Goals?

The process of setting financial goals is the same regardless of what you want to achieve. You might have a short-term goal of creating a monthly household budget and the process for making that goal SMART is the same as it would be if you had a long-term goal such as accumulating enough retirement savings that you can retire early and travel the world.

The best way to set a SMART financial goal is to begin with a general objective and then work your way toward identifying the specifics. For this example, let’s consider a goal to pay off your credit card debt and thus improve your credit score. Here are the steps you can follow—and for this example, we’ll assume that you already have a budget and know how much money you can pay toward your debt each month:

  1. Identify a general goal, in this case, to pay off your credit card debt as quickly as possible.
  2. Choose a method to pay down your debt. If you have only one credit card, you can skip this step; but, if you’ve got two or more, you’ll need to decide if you want to put extra toward the card with the highest interest rate (aka the avalanche method), the card with the lowest method (the snowball method) or put a little extra toward everything each month (the snowflake method).
  3. Review your budget to determine how much extra money you can pay toward your debt each month without impacting your ability to meet other financial obligations.
  4. Estimate how long it will take you to pay off your debt.
  5. Restate the goal as a SMART goal. It might look like this: Put 5% of my monthly net pay toward paying off my credit card debt by July 1st using the avalanche method.

We’d be remiss if we didn’t mention that goals may not always remain the same. If your financial circumstances change—if you get a raise or promotion or conversely, if you experience a drop in income—then you can and should revisit your goals to make sure that they’re still realistic.

What Are Some Examples of Short-Term, Medium-Term, and Long-Term Financial Goals?

When you’re ready to set financial goals, we suggest setting a combination of short-term, medium-term, and long-term goals. Here are the timeframes to think about when setting goals:

  • Short-term goals are goals that can be completed within a year.
  • Medium-term goals may take between one and 10 years to achieve.
  • Long-term goals typically take over a decade to accomplish.

In some circumstances, a short-term goal might be a component of a long-term goal. An example would be if you had a long-term goal of retiring early and set a short-term goal to open an IRA to supplement your retirement savings.

Examples of Short-Term Financial Goals

Here are some examples of short-term financial goals to inspire you to help you with personal finance:

  • Transfer your savings from a traditional saving account to a high-yield account by the end of the year.
  • Set a savings goal to fully fund your emergency account within a year by transferring 10% of your net income into a high-yield account.
  • Pay off the credit card with the highest interest rate in six months by paying an extra $100 every month.
  • Save $3,000 to pay for a family vacation by the beginning of the summer.
  • Take out a personal loan to consolidate your debt.

You would need to add some detail to these depending on your cash flow and current financial circumstances.

Examples of Medium-Term Financial Goals

A medium-term financial goal requires more time and more money to achieve than a short-term financial goal. Here are some examples of medium-term financial goals:

  • Pay off your student loans in 8 years by paying an extra $500 per month.
  • Save the money required to start a small business. (This goal might be broken down into smaller goals that include improving your credit score, creating an emergency fund with one year of expenses, and so on.)
  • Save enough money to make a 20% down payment when you’re ready to buy a home.
  • Improve your credit score by making on-time payments and eliminating debts.

You can see how these goals might be broken down. You might need to create a budget to determine how much money you can put toward your student loans or create a debt repayment plan to improve your credit score.

Examples of Long-Term Financial Goals

Long-term financial goals may take years or even decades to complete. Here are some examples of long-term goals you might want to set:

  • Pay off mortgage five years early by making extra payments toward the principal.
  • Build an investment portfolio that generates enough income for you to retire early.
  • Save enough money to fully pay for your children’s education.
  • Hire a wealth management advisor to help you maximize your investment earnings and preserve wealth for your heirs.

Your long term goals should be ambitious but still achievable. It’s important to identify the various elements of each long-term goal and how you can best cross each element off your list with the overall aim of meeting your long-term goals.

What Steps Should I Take to Achieve My Financial Goals?

Achieving your financial goals will be challenging because life has a way of handing us surprises that can derail us if we’re not careful. Here are some pointers to help you stay on track and reach your financial goals even when you may feel discouraged:

  1. Identify your most important financial priorities. You may not be able to pursue every financial goal you have at once. For example, you might need to focus on paying down your credit card debt and creating an emergency fund before you can start saving for a down payment on a house.
  2. Organize goals into short, medium, and long-term objectives. Keep in mind that some short-term goals may be components of reaching a long-term goal.
  3. Review each goal and make it SMART. Include specifics of what you’ll do, when you’ll do it, and when you expect the goal to be completed.
  4. Build your financial goals into your budget. We like using a zero-based budget where you account for every penny you earn.
  5. Prioritize your goals. It’s common for people to make saving money an afterthought, but we suggest paying yourself first. Your discretionary spending should be the amount that fluctuates each month.
  6. Revisit your goals regularly. When your financial circumstances change, for better or worse, your goals may also need to change.  If you get a raise, you may be able to accelerate your debt repayment or savings goals. If you lose income, you may need to push your target dates back and revisit your budget, too.

If you have an array of financial goals, you may want to consider working with a financial advisor to work out the details and be sure that you reach your goals. 

Set SMART Financial Goals with Leaders Credit Union

Setting financial goals is an essential element of financial literacy and well being. You can use this guide to identify your most important financial priorities and set SMART short, medium, and long-term goals.

Do you need guidance with setting and keeping financial goals? Access our free Smart Budgeting Tool Kit and choose the budgeting and money management strategies that work best for your needs.