5 Financial Goals you Should Have in Life
Having financial goals is very important to plan your expenses in the future, avoiding living from day to day, to achieve what many call financial freedom. That is, having the ability to have enough income without having to work overtime.
In this article you will learn how to set a financial goal and 5 objectives that you can apply according to your ambitions, resources and time, in order to improve your personal finances.
What is a financial goal?
It is an objective or purpose generally focused on achieving money-related benefits.
There are many examples of financial goals. For example, saving a certain percentage of your income, paying off your credit cards on time or getting out of debt.
How are financial goals classified?
They can be divided according to the time it will take you to achieve the financial goal. Thus, goals are divided into:
- Short-term: These are achieved in days, weeks or months. Example: Save 30% of your income to buy a car.
- Medium term: These are achieved between one and five years. Example: Consolidate the debts of three credit cards through a personal loan to be paid in 24 months.
- Long term: These take five or more years of work. Example: Taking out a mortgage loan, which usually have terms of 5 to 30 years, to own a home.
SMART strategy to set a financial goal?
Financial experts suggest the SMART system, which helps you set achievable goals and helps you move from desire to action.
SMART stands for:
- Specific: The goal is stated in detail. Example: instead of saying “I will save”, it is preferable to say “I will save $1000 in interest per year by consolidating the debt of two credit cards”.
- Measurable (Measurable): It must have parameters or quantitative statistics to see the success of your goal. Example: “I will save $1000 a month to create my emergency fund”.
- Attainable: The goal must be realistic to avoid frustration for not achieving it. Example: It is not possible to reach 1 million dollar in a year if you do not have enough income to accumulate it. It is better to set a lower, but realistic amount.
- Relevant: The financial goal must have a considerable impact on your personal life. Example: Saving for retirement, since it is relevant to live a dignified old age with a decent income.
- Timely: The purpose must have established dates and deadlines. Example: “I will make my budget on the 16th of each month for 2 years in a row”.
What elements should a financial goal meet?
A financial goal must have four qualities:
- Be specific: It should not have vague concepts and be measurable.
- Include the exact amount: Put the exact value of how much that financial goal is going to cost you.
- Set an end or closing date: It means to calendar or put dates to the financial goal.
- Explain how you are going to achieve it: Detail the actions you will take.
For example, if your goal is to increase your income, you should indicate the type of freelance or part-time work you will do, for how long and the income you expect to earn.
You can set financial goals as follows for each of the 3 categories – Short term, Medium term and Long term
- How much does it cost?
- When you will meet it?
- What will I do to achieve it?
Financial Goal 1 – Save
What is saving?
It is the action of saving or accumulating a portion of your income for future use.
How can I start saving?
You can try following methods to start saving money and turn it into a financial goal:
a) Set aside income
Use between 10 and 20% of your monthly income and deposit that amount in a savings account. You can set up an automatic transfer leveraging digital technology.
b) Save your change
Set aside leftover change from your purchases for the day and place it in a bottle or piggy bank. It’s a slow but sure strategy. Once you have a considerable amount, deposit it in a savings account to avoid the temptation to spend it.
c) 52-week challenge
This method consists of saving during the 52 weeks of the year, starting by saving $10 in the first week, $20 in the second and so on, adding $10 each week, until reaching $13,780.
d) 50-30-20 Rule
Divide your monthly income as follows: 50% for basic needs, such as paying rent or food, 30% for lifestyle-related expenses, such as going to the movies, and the remaining 20% for savings and investment.
Financial Goal 2 – Pay off your debts
What are debts?
These is money that a person or institution asked another person or institution, with the obligation to pay within a certain period of time.
What are good debts and bad debts?
Good debts are those that help to grow and generate more wealth. For example, the purchase of real estate, tools and equipment, working capital, education, etc.
Bad debts are those that do not help you leverage to generate more wealth. But, on the contrary, costs you more than they produce or are worth and affect your personal finances.
Check out: Good debt vs bad debt
How can I get out of debt?
Here are some recommended strategies to include in your financial goals:
a) Negotiate fixed payment plans
When you are afraid of losing control of a debt, you can negotiate with the financial institution to negotiate a fixed payment plan with terms from 6 to 60 months.
When you have a good flow of income, you can use two popular strategies to reduce your debts. Snowball, in which you pay off the smallest debts first, and avalanche, in which you pay off the debt that charges you the most interest first. In both cases you will notice that, as you get out of debt, you will have more and more money to put into savings.
If you have several loans that charge you a lot of interest, look for a finance company that will help you consolidate them with a lower interest rate.
Among the advantages of this financial tool are saving a lot of bank interest, paying your debts in a single fixed monthly payment, as well as gaining peace of mind and reducing stress.
Financial Goal 3 – Invest
What is investing?
Investing is about making your wealth grow, that is, the value of your assets increase over time. Unlike savings, investing allows your money not to lose its purchasing power due to inflation, since they usually offer higher yields than a savings instrument. Investing involves more risk than saving, but it helps your money grow faster.
How can you start investing?
There are several instruments that offer you yields that are often higher than the current annual inflation rate. Some examples are:
(b) Real estate
(c) Fixed Deposit: Are investment instruments sold to you by banks in exchange for a fixed yield.
d) Stock Exchange: This is the market where the country’s main companies are listed, and where private investors can invest their money by buying shares. The returns received by the shareholders will depend on the growth and financial activity of the company.
e) P2P Lending Platforms: These are fintech platforms where investors lend their money to other people who need credit or a loan. The advantage of this model is as follows: the borrower pays less interest and the lender earns higher returns.
Financial Goal 4 – Take out insurance
Having insurance is essential to protect your assets and personal finances in the event of an accident, illness, theft or death. In exchange for an amount of money each month, the insurance company protects you from these unforeseen events.
There are several types of insurance:
- Major medical expenses: They help you pay for the costs of a major illness or accident, for example, a cardiac surgery.
- Health plan: They help you with an amount of money to pay for medications, hospitals and other medical bills.
- Auto: Protects your vehicle in case of an accident or damage.
- Life: You pay an amount of money to your relatives in case of your death.
Financial Goal 5 – Have a good credit score
The credit score is a rating given to you by credit bureau, an institution specialized in knowing and recording your credit history, i.e., how good you are at handling credit and if you are able to pay those debts on time.
Having a good score means having access to better credit and loans, with lower costs and allowing you to achieve other medium and long term financial goals.
To achieve a good score, here are some tips:
- Do not fall into arrears, i.e., be more than 90 days late in paying a loan.
- Do not use more than 30% of your credit limit.
- Do not apply for too much credit in a short period of time.
- If you have many credits that charge you high interest rates, unify them through debt consolidation.
Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].