Do you know your debt payoff date, or when you are going to retire? How about how much you need to cover your expenses for a year if you got laid off or could not work? If you do not know the answer to these questions, then it is time that you set some financial goals.
Why You Should Set Financial Goals
Look, I have said it before and I will say it again, “You can’t expect what you don’t inspect”. If you aren’t willing to take the time to write out your goals in a very specific and measurable way, then, basically, what you are telling the universe is that you are ok with just accepting whatever scraps life has to throw at you.
I know that is not what you want for your life (at least I hope it’s not), so take 10-15 minutes . . . an hour if you need to . . . to sit down and really think about what it is you want to achieve over the next year that will get you closer to your long-term goals.
When we are talking about goals on a financial level, we need to attack them from a few angles.
If you have debt, you need to set goals to help inch your way closer to debt freedom. After living through a pandemic and multiple recessions, it is no surprise how important it is to have an emergency fund savings goal. And since we aren’t getting any younger, you need to set a long-term investment goal to make sure you are set for retirement.
Before we get into what those goals will look like, however, I want to talk about how you set the right type of goals.
How to Set Achievable Goals the S.M.A.R.T. Way
SMART goals have been around for quite a while, but, in case they are new to you, I’ll provide a brief overview of what they are so that we have a good foundational base of understanding before moving on to the next step.
SMART stand for Specific, Measurable, Attainable, Relevant, and Time-based. Let’s break that down a little further…
When you set goals, you want them to be very specific.
We need DETAILS.
For most people, we are probably not going to pay off all of our debt next year. So let’s set a specific goal that can be accomplished within the year.
For example, you don’t want to simply say, “I want to pay off debt”. What does that even mean!? How much debt do you have? When do you want to pay it off? What type of debt is it?
Can you pay off one of your debts? Can you pay off $1000 or $10,000 of your debt? Do you want to focus on making consistent minimum payments for 12 months straight? Can you commit to adding an extra $5 or $50 to your minimum payment?
The more specific the better. You do not want there to be any confusion as to what it is you are working to achieve.
To make your goal specific, make sure it answers questions like:
- What do I want to accomplish?
- Who is involved in making this happen?
- What steps are involved to achieve this?
Example: I will pay off the balance on my Target credit card by paying more than the minimum balance owed every month, and by not adding any new charges to the card.
A goal is measurable when you can quantify it. When you can add numbers, it is very easy to measure whether you have hit that goal or not.
For example, it is not enough to say, “I will be rich in retirement”. How much money do you need a year to feel “rich”? What age do you want to be retired?
To make your goal measurable, make sure it answers questions like:
- How many?
- How much?
- What percentage?
Example: I will pay off the $2,357.46 balance on my Target credit card by adding an additional $157 to the $59 minimum balance owed every month, and by not adding any new charges to the card.
Now, the attainable part is really important. This step is how you make sure you get yourself mentally on board with your new goal. If your goals are specific and measurable but they are unreasonable and outlandish, then they will still be impossible to achieve. When your brain does not believe that something is possible, it is going to be really hard to get motivated to even try to work towards that goal.
For example, don’t say, “I will save $9,000 to take three, 2-week vacations in the next 12 months” when you have $300 per month you can allocate to your vacation fund, and you only get 5 vacation days per year at your job. Accomplishing this goal requires you to suddenly come up with an extra $3,600, and for your job to magically grant you an extra 25 vacation days.
To make your goal attainable, make sure it answers questions like:
- How can I realistically accomplish this goal after considering all possible limitations and constraints?
- Is this goal realistic enough to motivate me, or does it discourage me?
- Do I have full control to achieve this goal?
Example: I will reduce the balance on my Target credit card by $1,000 by adding an additional $26 to the $59 minimum balance owed every month, by not adding any new charges to the card, and by returning the $353 fancy coffee machine I purchased last week.
A goal is relevant when it aligns with your overall vision and works in harmony with your other goals.
For example, if retiring in the next 20 years is really important to you, it wouldn’t make much sense to say, “I will begin investing $100 per month 10 years from today so I can retire in 20 years and live off my investments”.
Yes, this goal is specific, measurable, and even attainable (the saving $100 part …), but it is not in alignment with your overall goal of achieving financial independence in 20 years. Not only would you not be giving yourself enough time to allow compound interest to work, but you also would not be investing enough per month to be able to retire comfortably 20 years from now (unless you can live off of about $810 per month …).
To make your goal relevant, make sure it answers questions like:
- How does achieving this goal move me closer to my ultimate goal?
- Why am I setting this goal?
Example: I will reduce the balance on my Target credit card by $1,000 by adding an additional $26 to the $59 minimum balance owed every month, by not adding any new charges to the card, and by returning the $353 fancy coffee machine I purchased last week so that I can decrease my debt to income ratio and increase my credit score.
Last, but definitely not least, you need to set a date for when you plan to accomplish each goal. Just because you are setting goals you want to achieve over the next 12 months, it does not mean that every goal will be accomplished on the last day of that timeline. Some goals may be achieved much sooner and kick-start the next mini-goal to begin!
In order to even be able to set short-term goals, you will first want to set your big, overall goals so you can backwards plan.
By setting your major goals first and adding a deadline, you can more easily determine what baby goals can be achieved within the next 12 months that will still have you on track to hit your major goal on time.
For example, if you set a big goal of buying a $20,000 car with cash, but you never set a deadline for when you want to buy the car, then you will not know if you are actually on track to achieve that goal when you say, “I will have $600 in my car fund 12 months from now, by saving $50 per month in my car fund so I can buy a $20,000 car.”
Sure, you may be successful in achieving the short-term goal of saving $600, but, at that savings rate, it will take you over 33 years to be able to buy a $20,000 car in cash!! Yikes!
To make your goal time-based, make sure it answers questions like:
- When will this be accomplished?
- Does this deadline keep me on track?
- Is this deadline challenging yet realistic enough to keep me motivated?
Example: By [Month] [Day], 20XX, I will reduce the balance on my Target credit card by $1,000 by adding an additional $26 to the $59 minimum balance owed every month, by not adding any new charges to the card, and by returning the $353 fancy coffee machine I purchased last week so that I can decrease my debt to income ratio and increase my credit score.
Three Goals You Must Include for Financial Success
Now that you understand what SMART goals are and how to make them, let’s dive into the three major types of goals you should create to set your financial gameplan up for success.
1. Debt Payment Plan Goal
If you have debt, you need to set some debt goals. If you don’t have any debt – ummm heck yea! CONGRATULATIONS!! – feel free to move on to the next section.
For the rest of us, keep reading …
What is your big long term debt goal? Typically, the goal is to eventually be debt free, right? To be able to create a debt freedom goal, there are a few things you have to take into consideration.
- What is the total amount of debt you currently have?
- How many debt payments do you have?
- Is it possible to consolidate any or all of your debts so that you have a lower total payment AND faster pay-off date?
- How many different types of debt interest do you have (fixed, variable, APR, simple, etc)?
- How much is the total of all of your minimum payments?
- What are the interest rates for each debt?
- What are the balances for each debt?
- Do you have any extra money to add on top of your minimum payments AND save at the same time?
- Are you able to stop accruing more debt at this time so you can focus on paying it all off?
Not all debt is created equal, so it is important to take a proper inventory of your debt so that you can create a payment plan that saves you the most time and money.
Even if you can only pay minimums on all of your debt at this time, you can still create a payment plan that will save you time and money.
I explain more about how to strategically structure your debt payment plan to achieve the best results in a video I made comparing two popular debt payment methods: the debt snowball vs. the debt avalanche method. You can also read about it here. I encourage you to watch the video or read the blog post so that you can determine which method will be the best one for you.
Once you have decided how you are going to tackle your debt, you can then set your debt payment plan goals for the next 12 months.
I’ll explain more in the next section, but please don’t get too hung up on throwing all of your money to pay off debt. While it would be nice to be debt free, the reality is that most people will have debt for the majority of their life.
You want to make sure your debt is manageable – you are not accruing any more debt while trying to pay off what you have; you are not behind on your payments; you can afford the necessities, etc. – and then you want to prioritize the next major goal: investing.
2. Financial Independence/Nest Egg Number Goal
When it comes to creating your investment goals, what I am about to tell you may not sound like what you may have heard from some older financial “gurus” out there (*cough* Dave Ramsey *cough*), but I am telling you, from my own personal experience, if you do not take these actions now, you are going to regret it later.
I do not agree with the philosophy of focusing solely on paying off your debt before you focus on any type of investing. In one of my very first Money Mondays videos, I explain the rule of 72 and the power of compound interest.
The most powerful asset that you have to work for you on this journey to financial independence is time, and once time is gone you can never get it back.
Let me repeat that . . . The most powerful asset that you have to work for you on this journey to financial independence is time, and once time is gone you can never get it back.
The only way to make up time is with a lot of money. So, unless you know that you will be quadrupling your income over the course of your lifetime while maintaining the same cost of living or you have a billionaire relative who is leaving you everything, I highly recommend that you take advantage of the time that you have right now to make the investments you need to achieve your future financial goals.
So, what does this look like?
If you are starting with $0 invested, and your goal is to retire in 40yrs living off of the exact same salary you are making today, then you are going to need to save about 11% of your gross income every month for the next 40 years to achieve that goal.
For example, if you make $40,000 a year at 25 years old, and you want to retire at 65 and live off of $40,000 a year in retirement, that means you will need to have a retirement nest egg of $1,000,000 by age 65. This is also known as your Financial Independence Number or FIN. Your FIN is approximately 25 times the yearly amount you want to live off of in retirement. This number is calculated to allow you to withdraw 4% every year (4% of $1,000,000 = $40,000) without you ever running out of money by the time you pass away.
The more time you have, the less of that $1,000,000 you have to actually save because compound interest takes over, and your money makes money for you.
In this scenario, if you invest in index funds that track the S&P 500, your investment can theoretically yield a conservative 7% rate of return (after accounting for inflation) over that 40-year period.* [past performance does not equal future performance]
With compound interest on your side, you would only need to save a little over 11% of your gross monthly income every month, or only $182,870.40 over the entire 40-year period to end up with $1,000,000!
Time for the harsh truth . . .
If you are not currently saving 11% of your income, you have less than 40 years to invest until you want to retire, and you want to be able to live on no less than your current salary in retirement, then you are behind.
I promise I am not trying to be mean. I don’t want to be the bad guy. But I am also not going to shy away from reality.
Now is the time to make a clear plan to start saving what you can in order to achieve your financial independence number, or something close to it.
If saving 11% of your income sounds super scary, let’s put it into perspective.
People who work for employers who are paying into pension plans (i.e. pension plans), such as government employees, teachers, etc., do not have a choice. No matter what these people’s incomes are, their employer can require that a predetermined percentage of their income be invested into the pension.
I was a high school math teacher for three years, and I don’t think I have to convince you that teachers are not paid very well. Yet nearly 7% of my income was taken out every month and put into the teacher’s retirement system whether I wanted it to or not. This was necessary to ensure that I would have the retirement benefits promised to me after X many years of service.
The point is that you have to think about your retirement savings as an absolute necessity. Just like you have to have a roof over your head, you have to pay utilities, and you have to eat food, investing for your retirement can not be optional.
My challenge to you . . .
If you currently do not have any income being automatically deposited into a retirement account and invested in index funds, then one of the financial goals I am going to implore you to make over the next 12 months is to automate your investing and build your investment amount to at least 5% of your monthly gross income by the end of the 12 months.
You have to crawl before you can walk. If you start by investing 1.25% and increase the amount by another 1.25% every 3 months, then you will be investing 5% for the last three months of the year.
You will be surprised at how easily you will be able to adjust to living without that money when it never hits your bank account in the first place. Future you will be eternally grateful.
3. Emergency Fund Goal
After you have assessed your long-term investment needs, it is time to look at your emergency fund savings.
Do you have an emergency fund? This is your rainy day savings account that you use only for emergencies, like if you lose your job and are unemployed for 6 months, or your car needs a repair that will cost at least $1,000, and you have to have your car to keep your job.
If you are starting from scratch, then you will need to prioritize getting at least $1,000 saved as fast as possible. This means paying only minimums on your debt payments (if you had planned to allocate a little extra on top), and temporarily pausing any retirement investing.
For most Americans, $1,000 cash is enough to cover most emergencies that tend to spring up and cause financial hardship for those who are unprepared. That is why you want to prioritize building your emergency fund up to at least $1,000 before tending to the rest of your financial goals.
You have to build a strong financial foundation first.
Once you’ve saved $1,000, you are not done. While you can scale back from allocating 100% of your extra money to just the emergency fund, you should continue to add to your emergency fund until you have at least a year’s worth of necessary expenses saved.
The pandemic was a big wake-up call for a lot of people. For many, they are still affected by the financial toll the pandemic took on their lives. Gone are the days of thinking that 3 months or 6 months of your expenses is enough to protect you. Nowadays, it takes an average of 6 months for people to find a new job after being terminated or laid off.
Calculate how much money you need to cover your most important and necessary expenses for one month, and multiply that number by 12. That amount is your minimum emergency fund savings goal.
If you are feeling ambitious, calculate your typical monthly budget, and multiply that number by 12 to get your savings goal.
Phew! We covered a lot today!
To summarize, setting the right type of goals is critical to your financial success. You can begin building your financial game plan by focusing on setting SMART goals over the next 12 months that answer the following three questions:
- What is a mini debt goal that you can set to make you feel like your debt is manageable?
- What mini investment goal can you set to get you well on your way to investing at least 11% of your income and closer to your FIN?
- What emergency fund goal can you set to get you to $1,000 as fast as possible and as close to saving one year’s worth of necessary expenses as you can?
I want to make it very clear that, with the exception of saving your first $1,000 in your emergency fund, you should set goals in these three areas such that you can work on each area simultaneously.
For example, if you have an extra $100 a month to put towards all three of your goals, then you need to think about how to divide that $100 three separate ways so you can work towards achieving all three goals at the same time.
1. Budgets for the Win!
Once you have your big vision goals determined, you will need to know how much money you can actually allocate towards these goals in order to be able to create realistic and effective mini-goals. The best way to figure that out is by analyzing your budget.
If you do not already have a budget, you should prioritize making one after you have your big vision goals set.
With a budget, you can get an idea of how your money is currently being spent and what areas you can cut back or eliminate in order to maximize the funds you can allocate toward your financial goals.
Once you know how much money you are working with, you can finish creating your mini 12-month goals.
If you’d like some guidance on how to make a budget, I made a video that walks you step by step through the process. You can also read about it here. Feel free to check those out so you can get your budget prepared.
2. Compound Interest: Friend or Foe?
Remember that compound interest is working in each one of the areas we discussed today.
It is working against you in with your debt.
It works for you when you invest.
And it can work for you with your emergency fund if you use the right type of account.
Just because you should never invest your emergency fund savings, it doesn’t mean it has to sit in some raggedy bank savings account accruing $1 a year in interest. Open up a high-yield savings account for your emergency fund, and enjoy 100x returns on your savings compared to traditional savings accounts. [see video]
Ok, if you have not been able to tell, I get really fired up when I am talking about setting goals. Particularly because it is so easy to do.
But what is easy to do is also easy not to do.
It is going to be really easy to finish reading this article and go back to doing whatever it is that you were doing before and forget all about this. But it is also going to be just as easy to finish reading this article, pull out a piece of paper and a pen, and start writing your goals down.
I want these next 12 months and beyond to be absolutely amazing for you. I hope that you take some of these tips that I gave you in order to get closer to the financial goals that you have set for yourself.
You deserve financial stability and wealth.