How to Set Financial Goals: A Guide - SmartAsset

Sometimes it feels like you’re spinning your wheels and every paycheck is gone before you’ve spent it. You might wonder why you try so hard to save but that number never seems to grow.

The key to reaching financial security is setting financial goals. Without working toward anything specific, you’re likely to spend more than you should without realizing. When it comes time to retire, you’ll wonder how in the world you’ll survive. Or maybe you’ll think you can’t ever actually retire. You might get stuck in a vicious cycle of debt upon debt, leaving you vulnerable to life’s unexpected moments.

Financial planning doesn’t have to be difficult. You can speak with a financial advisor, who is best equipped to help you on your way to financial success, or you can educate yourself, sit down and write up a list. Follow this guide and take the opportunity today to set yourself on firmer financial footing.

Step One: Break It Down

Don’t start off thinking of a far-off retirement and the tens of thousands you might need to buy a house. Break down your financial goals into smaller, manageable mini-steps. Setting shorter-term goals can help you gain confidence and internalize the foundational knowledge you’ll need to achieve your larger goals over time.

Think about what you want and how to achieve it. Attach a reason to your goal so you can remind yourself when it seems insurmountable. Do you want to build up savings in case you lose your job? Aim to set aside $500 or even $1,000 first. Do you want to pay off debt and save for your dream wedding? Start by aiming to pay off more than your minimum monthly payment.

Maybe you have many financial goals and you can’t determine which one has priority for you. That’s fine. Many people will want to pay off credit card debt and save for a house. Or maybe you want to buy a house and save for your child’s college education. If you have large goals, you still need to break them up into manageable milestones.

Step Two: Establish a Budget

Establishing a budget is a priority when it comes to setting and achieving your financial goals. Start by assessing your income, income tax situation, expenses and net worth.

One popular budgeting method is the 50-30-20 approach, which means allocating 50% of your take-home pay towards necessities, 30% towards wants and 20% towards savings and paying off debt. You can also use a budgeting app or program that will combine information from all your accounts so you can label each expense by category.

You may discover that all those lattes really do add up to hundreds of dollars, or perhaps you spend far too much on clothes and shoes. Maybe, in fact, you’re a little guilty of buying too many snacks at the grocery store, and you could actually save by trimming down your food expenses by something as little as $50 a month. Every amount saved can be allocated instead to savings or debt reduction.

Step Three: Set Up an Emergency Fund

By trimming down unnecessary expenses, you can instead divert those funds to your emergency savings account. An emergency fund is money you set aside specifically for unexpected expenses. Is your mini-goal to save up $1,000? Then try setting aside those little amounts you discovered when you were establishing your monthly budget.

Financial experts recommend saving enough to cover three to six months’ worth of expenses. This might seem like a lot, but did you know that nearly 40% of Americans don’t have enough cash to cover a $400 unexpected expense? If you can aim for at least $500 in emergency savings, you’ll already be better prepared than most.

Step Four: Pay Off Debt

Since having an emergency fund is such a priority, you might think debt repayment isn’t a big deal. But paying just the minimum for credit card debt and school loans means your interest will keep accruing and your debt balance may never decrease.

Focus on paying down high-interest debt first, like credit card debt. Then you can move on to lower-rate debt like student loans and your mortgage. If you are trying to save and repay debt simultaneously, try to allocate 60% to savings and 40% to debt repayment.

Step Five: Set Aside Some Money for Retirement

Again, saving enough for unexpected expenses and paying off debt will likely seem more important than saving for a far-off retirement. However, the longer you have to accumulate retirement savings, the more you’ll gain in interest over time. As part of your budget, aim to take advantage of employer-sponsored retirement plans and enroll in a 401(k).

Experts generally recommend saving from 10-15% of your income for retirement. If that seems like too much out of your paycheck, you’re not alone. Employers will often match up to a certain percentage for 401(k) contributions though, so try to contribute at least that amount. This can range from 3% up to even 8%. So if you contribute 6% of your income, and your employer matches that amount dollar for dollar, you’ll actually be saving 12% for retirement. And half of that was essentially free!

Ask Yourself If Your Goals Are SMART

The key when setting financial goals is to be SMART: Specific, Measurable, Attainable, Relevant and Time-bound. You’ve narrowed down your big goals to smaller, manageable steps, and you’ve budgeted well for achieving those goals. Giving yourself a limited time in which to achieve those goals will help create a sense of urgency, bringing your financial goals to the top of your life priority list. That’s why breaking down large goals into smaller milestones is helpful.

Every time you cross off a shorter-term, small goal from your list, revisit your larger picture and continue setting mini goals for you to achieve. You’ll be able to see how you’re making progress, and you’ll be well on your way to better financial security.

Bottom Line

Setting financial goals is vital to improving your financial health. You should start by establishing a budget to identify areas where you can trim and save instead. Every dollar counts. By following SMART steps, you can break down large goals into manageable financial milestones, and as time progresses, so will your financial picture. Make sure to revisit your goals at least once a year, and once in a while, relax and go treat yourself for a job well done.

Tips for Building Wealth

Not sure what investments and strategies will help you meet your long-term goals? For a solid financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’s free investment calculator to get a good estimate of how to grow your money over time.

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