Understanding and Crafting Financial Goals

Financial goals are essential for achieving financial success and securing your financial future. They can be categorized based on their time frame and whether they are numbers-based or habits and behaviors-based. Let’s explore the types of financial goals and provide examples to help you craft your own.

Types of Financial Goals

Traditionally, financial goals are classified based on their time frame:

1. Short-Term Financial Goals: These are goals you aim to achieve in the near future, typically within one year or less.
2. Medium-Term Financial Goals: Medium-term goals have a time frame of one to five years. They require more time and planning than short-term goals but are achievable within a reasonable period.
3. Long-Term Financial Goals: Long-term goals extend beyond five years and often involve substantial financial planning and commitment.

Additionally, financial goals can be categorized based on their nature:

• Habits and Behaviors-Based Financial Goals: These goals focus on changing your financial habits and behaviors. They may not have specific numerical targets but aim to instill better financial practices.
• Numbers and Digits-Based Financial Goals: Numbers-based goals have specific financial targets, such as saving a certain amount of money, paying off debt, or reaching a particular income level.

Examples of Habits and Behaviors-Based Financial Goals

1. Pay for All Vacations in Cash: Adopt a habit of saving in advance for vacations or using credit cards with rewards, paying them off before accruing interest.
2. Maintain a Checking Account Buffer: Develop the behavior of keeping a buffer in your checking account to avoid overdrafts and financial stress.
3. Consistently Pay Off Credit Card Balances: Make it a habit to pay off your credit card balances in full before the grace period ends to avoid interest charges.
4. Gradually Increase Charitable Contributions: Start tithing a certain percentage of your income to your church and increase it gradually until you reach the desired 10%.
5. Begin Investing: Establish a habit of regularly investing your money for long-term financial growth.
6. Contribute to Employer’s 401(k): Enroll in your employer’s 401(k) plan and gradually increase your contributions to maximize the employer match.
7. Limit Credit Card Use to Emergencies: Change your spending behavior by reserving credit card usage solely for unexpected emergencies.
8. Participate in Health Insurance Wellness Programs: Commit to meeting the financial incentives provided by your employer’s health insurance wellness program.
9. Start a 529 Plan for Education: Develop the habit of saving for your child’s education by opening a 529 plan.

Examples of Numbers-Based Financial Goals

1. Pay for an Annual Vacation in Cash: Save a specific amount of money to cover the cost of your annual vacation without going into debt.
2. Maximize IRA Contributions: Contribute the maximum allowed amount to your Individual Retirement Account (IRA) for the year (e.g., $6,000 per person).
3. Clear Student Loan Debt Before Child Starts School: Aim to pay off your student loan debt before your child begins their education.
4. Fund Emergency Fund to $3,000: Save enough to have a $3,000 emergency fund for unexpected expenses.
5. Pay Off Your Mortgage Before Retirement: Set a goal to eliminate your mortgage debt before you retire.
6. Save for One Year of Living Expenses: Build a financial cushion that can cover your expenses for one year in case of emergencies.
7. Create a Comprehensive Retirement Plan: Develop a detailed retirement plan that includes savings, investments, and income sources.
8. Reduce Monthly Expenses by $150: Identify areas where you can cut expenses and free up an extra $150 per month.
9. Negotiate a Salary Raise: Set a goal to negotiate a salary increase with your employer.
10. Donate a Percentage of Income to Charity: Commit to donating a specific percentage of your income to a charitable organization regularly.
11. Save for a 10-Year Anniversary Trip to Italy: Plan and save for a memorable 10-year anniversary trip to Italy.

How to Write a Financial Goal

To write a clear and effective financial goal, follow this formula:

1. What Do I Want to Change or Achieve? State the specific financial goal you want to accomplish.
2. What Will Doing This Change About My Life? Describe the results and outcomes you expect to achieve by reaching this financial goal.
3. What Behaviors and Spending Habits Do I Need to Eliminate? Identify the negative habits and behaviors you must stop to achieve your goal.
4. What New Behaviors and Habits Must I Adopt? List the positive habits and behaviors you need to develop to attain your financial goal.
5. What’s the First Small Step? Determine the initial action you must take to get started. This step should be achievable in less than one hour.

Here’s an example using this formula:

“I’m going to start investing in my company’s 401(k) plan, by next pay cycle. So that I can immediately get paid more (through the company match), and eventually build a more secure retirement for me and my family. To do this, I’ll need to change how I think about my paycheck, since it will be less, and stop eating out so much. The first step I need to take is to talk to HR to get the paperwork to fill out.”

Crafting well-defined financial goals is crucial for financial success. Whether you’re focusing on numbers-based or habits and behaviors-based goals, having clear objectives and plans in place will help you stay on track and achieve your financial aspirations.