How to Set Financial Goals: A Simple, Step-by-Step Guide
Saving money is all well and good in theory.
It’s pretty hard to argue having more cash in your pocket could ever be a bad thing.
But what are you saving for? After all, money is just a tool. If you don’t have solid financial goals, all those hoarded pennies might end up floating in limbo when they could be put to good use.
Figuring out where your money should go might seem daunting, but it’s actually a lot of fun.
You get to analyze your own priorities and decide exactly what you think you should do with your hard-earned cash.
Talk about adulting, right?
But to make the most of your money, follow a few best practices while setting your goals.
After all, even if something seems like exactly what you want right now (Shut up and take my $500!), it might not be in future-you’s best interest. And you’re playing the long game… that’s why they’re called goals!
How to Set Financial Goals 101
To keep yourself from deciding your financial goals are “buy the coolest toys and cars, get deeply into debt and watch my credit score plummet” — all super easy to do — we’ve compiled this guide.
It’ll help you set goals and create smart priorities for your money.
That way, however you decide to spend your truly discretionary income, you won’t screw over the 10-years-from-now version of you looking anxiously over their shoulder.
First Things First: How Much Money Do You Have?
You can’t decide on your short- or long-term financial goals if you don’t know how much money you have or where it’s going.
And if you’re operating without a budget, it can be easy to run out of money well before you run out of expenses — even if you know exactly how much is in your paycheck.
So sit down and take a good, hard look at all of your financial info.
- Figure out how much money you have. It might be in checking or savings accounts, including long-term accounts like IRAs. Or, it might be wrapped up in investments or physical assets, like your paid-off car.
- Assess any debts you have. Do you keep a revolving credit card balance? Do you pay a mortgage each month? Are your student loans still hanging around?
Take the full amount of money you owe and subtract it from the total amount you have, which you discovered in step one. The difference between the two is your net worth.
That’s the total amount of money you have to your name.
If it seems like a lot, cool. Hang tight and don’t let it burn a hole in your pocket. We’re not done yet.
If it seems like… not a lot, well, you’re about to fix that. Keep reading.
Create a Budget
Once you’ve learned your net worth, you need to start thinking about a working budget.
This will essentially be a document with your total monthly income at the top and a list of all the expenses you need to pay for every month.
And I do mean all of the expenses — that $4.99 recurring monthly payment for your student-discounted Spotify account definitely counts.
Your expenses probably include rent, electricity, cable or internet, a cell phone plan, various insurance policies, groceries, gas and transportation; and other looser categories like charitable giving, entertainment and travel.
It’ll depend on your individual case — for instance, I totally have “wine” as a budget line item.
See? It’s all about priorities.
Start by listing how much you actually spent in each category last month. Subtract your total expenses from your total income. The difference should be equal to the amount of money left sitting in your bank account at month’s end.
It’s also the money you can use toward your long-term financial goals.
Want the number to be bigger? Go back through your budget and figure out where you can afford to make cuts. Maybe you can ditch the cable bill and settle for Netflix alone, or knock junk food out of your grocery cart to make for a healthier body and a fuller wallet.
Set the numbers you’re willing to spend in each category, and stick to them.
Congratulations. You’re in control of your money.
Now you can figure out exactly what you want to do with it.
Set the Foundation for Your Financial Goals
Before you run off to the cool-expensive-stuff store, hold on a second.
Your first financial goals should be:
- Get debt-free.
- Build an emergency fund.
These are the first two orders of business, but it’s up to you to decide in which order you want to accomplish them.
Many experts suggest making sure you have an emergency fund in place before aggressively going after your debt.
But if you’re hemorrhaging money on sky-high interest charges, you might not have much expendable cash to put toward savings.
That means you’ll pay the interest for a lot longer — and pay a lot more of it — if you wait to pay it down until you have a solid emergency fund saved up.
1. Build Your Emergency Fund
If you can, try to strike a balance between the two. Make more than the minimum payments on your loans, and also find some money to sock away and not touch, even if it’s only $10 or $25 of each paycheck.
You can make the process a lot easier by automating your savings with a tool like Digit. Or you can have money from each paycheck automatically sent to a separate account you won’t touch.
You also get to decide the size of your emergency fund, but a good rule of thumb is to accumulate three to six times the total of your monthly living expenses. Good thing your budget’s already set up so you know exactly what that number is, right?
You might try to get away with a smaller emergency fund — even $1,000 is a better cushion than nothing. But if you lose your job, you still need to be able to eat and make rent. Here’s a calculator to help you figure out a safe figure.
2. Pay Down Your Debt
Now, let’s move on to repaying debt. Why’s it so important, anyway?
Because you’re hemorrhaging money on interest charges you could be applying toward your goals instead.
So even though becoming debt-free seems like a big expense and sacrifice right now, you’re doing yourself a huge financial favor in the long run.
There’s lots of great information out there about how to repay debt, but it’s really a pretty simple operation: You need to put every single penny you can spare toward your debts until they disappear.
One recommended way to do it is in descending order of interest rate.
For example, if you have a $1,500 revolving balance on a credit card with a 20% APR, it gets priority over your $14,000, 5%-interest car loan — even though the second number is so much bigger.
Make a list of your debts and (ideally) don’t spend any of your spare money on anything but paying them off until the number after every account reads “$0.” Trust me, how awesome that moment feels will be well worth the effort.
As a bonus, if your credit score could be better, repaying revolving debt will also help you repair it — just in case some of your goals (like buying a home) depend upon your credit report not sucking.
3. Plan for Retirement
All right, you’re all set in case of an emergency and you’re living debt-free.
Congratulations! We’re almost done with the hard part, I promise.
But there’s one more very important long-term financial goal you most definitely want to keep in mind: retirement.
Did you know almost half of Americans have absolutely nothing saved so they can one day clock out for the very last time?
And the trouble isn’t brand-new: We’ve been bad enough at saving for retirement over the past few decades that 20% of today’s seniors can’t afford to retire.
If you ever want to stop working, you need to save up the money you’ll use for your living expenses.
And you need to start now, while compound interest is still on your side. The younger you are, the more time you have to watch those pennies grow. Look how little a 21-year-old needs to set aside now to retire wealthy!
If your job offers a 401(k) plan, take advantage of it — especially if your employer will match your contributions! Trust me, the sting of losing a percentage of your paycheck will hurt way less than having to work into your golden years.
Future you will thank you. Heartily. From a hammock.
4. Set Long- and Short-Term Financial Goals (the Fun Part!)
Is everything in order? Amazing!
You’re in awesome financial shape — and you’ve made it to the fun part of this post.
Consider the funds you have left — and those you’ll continue to earn — after taking care of all the financial goals above. Now think: What do you want to do with your money?
What experiences or things can your money buy to significantly increase your quality of life and happiness?
You might plan to travel more, take time off work to spend with family or drive the hottest new Porsche.
Maybe you want to have a six-course meal at the finest restaurant in the world or work your way through an extensive list of exotic and expensive wines. (OK, I’ll stop projecting.)
No matter your goals, it’s helpful to categorize them by how long they’ll take to save for.
Make a list of the goals you want to achieve with your money and which category they fall into. Then you can figure out how to prioritize your savings for each objective.
For example, some of my goals have included:
- Short-term financial goal: Save spending money for a trip overseas.
- Medium-term financial goal: Pay off my car within a year, or sell it — and its onerous loan — and buy a beater I can own free and clear.
- Long-term financial goal: Buy a house I can use as a home base and increase my income by renting it out while I travel. This will probably take me through the rest of my 20s.
By writing down my short- and long-term financial goals and approximately how long I expect it will take to achieve each, I can figure out what to research and how aggressively I need to plan for each goal.
It also offers me the opportunity to see what I prioritize — and to revise those priorities if I see fit.
I’m happy to see my goals revolve around gaining new experiences and increasing my financial freedom, rather than buying fancy-but-expendable new stuff.
You get to figure out what makes you happy to spend your money on… which is figuring out what kind of person you want to be.
Told you this was gonna be fun.
Jamie Cattanach (@jamiecattanach) has written for VinePair, SELF, Ms. Magazine, Roads & Kingdoms, The Write Life, Barclaycard’s Travel Blog, Santander Bank’s Prosper and Thrive and other outlets. Her writing focuses on food, wine, travel and frugality.