Getting Started – Part Two – Where Do I Want To Be?
Setting yourself financial goals might seem like an arduous and boring task; the sort of thing you have to do at work or school. For me though, setting goals is one of the most enjoyable things about personal finance!
The problem I think that most people have is that they try to set themself financial goals rather than personal ones. In doing this, they’ll come up with arbitrary figures that have no real meaning to them, making them incredibly difficult to achieve, not only from a motivation perspective but worse, from an actual numerical perspective. Be honest, how many times have you (even in passing) set yourself a goal like “I’m going to save more this year!”. Really – what the heck is that? How are you going to know you achieved it without a real figure attached to it? And why would you even want to beyond some sort of vague moral ‘because I should’ type of thinking?
My recommendation when starting to set financial goals is to think about where you want to be personally. What does your dream life look like? Depending upon your age and where you live, for you this can be as short term as ‘this year’ or as long term as ‘when I retire’. (Although just as an aside, it’s a very good idea to start contributing to your retirement fund the day you get your first job… it’s never going to be something you regret.)
Thinking about the things you want to achieve over your life (and even writing them down) will help shape your financial goals and in turn your budget and will also assist when it comes to working out where you need to cut back in order to achieve them. The things you want to achieve and do might be as big as ‘buy a house’, as (financially) small as ‘learn Spanish’ or as daunting as ‘be debt free’.
Once you’ve written down some goals for yourself you can break these down into more manageable chunks. For instance, if you want to buy a house in three years’ time, you can start thinking about how much you want to spend, how much you’ll need as a deposit and then work out how much you need to put aside each pay day to get there. Working out some rough goals for a longer time away has the added benefit of giving you peace of mind now that you’re saving enough. For example, you don’t have to worry or feel guilty when making a frivolous purchase like a new TV, because as long as you’re putting aside the amounts you determined you need, you’ll achieve the things you want.
Don’t make this too overwhelming a task by getting too specific too far in advance. Anything more than five years out for specific goals is probably a bit far. Beyond that you can write down rough goals like ‘buy investment property’ or ‘enrol in MBA’. Again, this means you don’t have to feel like you’re not saving enough now to achieve things down the road because you know you’ll do them, they’re just not your shorter term goals. Once you’ve saved enough to achieve the first goals on your list, you can move onto the next.
The important thing about these goals is that they should be SMART – Specific, Measurable, Achievable, Relevant and Timely. So, a goal that meets the SMART criteria might look like this:
Save $60,000 for a deposit to buy a 2 bedroom house by June 2012
Determining whether your goals are achievable might be a bit difficult at this time. In my next post I’ll look at how to examine your incomings and outgoings to improve your understanding of your overall current financial situation and start to write a budget
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