Financial Goal Setting

Financial goal setting is the process of establishing steps or actions to achieve one's financial goals. Financial goals are targets of monetary value that an individual strives to achieve in the course of their lives. These goals may be short, medium, or long-term.

The process of setting a financial goal determines the individual's investment trajectory. It helps the individual plan for expected or contingency expenses that arise in the future. A time and method are assigned for achieving them. This helps individuals maintain discipline in their investment journey, manage expenses, and even achieve financial freedom.

Financial goal setting is the roadmap prepared to achieve financial goals. It involves choosing the right goals and identifying the methods of achieving them. Maintaining logic and discipline helps achieve these goals within the stipulated time.

The goal-setting process helps provide purpose and direction to financial decisions. The two most important factors that contribute to this are commitment and clarity. Clarity in the goals and methods to achieve them and commitment to executing them are key. This is why setting SMART goals is important. The SMART acronym stands for goals that are specific, measurable, achievable, realistic, and time-based. 

Financial goal setting worksheet involves taking a number of actions. It requires an assessment of finances, which includes checking bank statements, credit card statements, records, and loans. This helps in reflecting on the money goals and figuring out what actually is essential for the individual. While buying a house is a priority, paying off student loans can be an immediate priority compared to the former. It aids in sorting out expenses and saving for important things. The establishment of a budget follows it and is not limited to clearing debts and buying assets; it shall also include planning for a vacation. The most valuable actions to be taken are investing in the right direction, staying on track, and reviewing them periodically.     

Given below are some of the general steps an individual can take in terms of setting financial goals. It consists of listing down the goals and defining each of the goals through the amount of time required to achieve them. This includes keeping them measurable and setting clear timelines, which is followed by budgeting and choosing a proper investment vehicle. Let us now look at how goals can be broken down into short-, medium-, and long-term goals and the methods of achieving them. 

#1 - Short-Term Goals

Short-term financial goals are those that are to be completed within 1-2 years. They should act as a foundation for an individual's mid- and long-term goals. Examples include building an emergency fund, purchasing vehicles, paying off credit card loans, etc.   

To achieve short-term financial goals, it is necessary to establish a budget and set aside small funds periodically. Budgeting helps analyze where unnecessary expenses can be cut, and saving them every month leads to a corpus. This can be put in a high-yield savings account to be drawn in emergencies. Saving small amounts of money can be done by cutting unwanted expenses, adding income sources, or making fixed-amount automated transfers. The debate between clearing off loans before setting emergency funds or creating an emergency fund first depends on the individual.

#2 - Mid-Term Goals

Mid-term goals are those goals that span for 3-5 years. Examples include paying off a student loan, saving for higher studies, making a down payment for a house property, renovating existing property, etc. These are goals that help one achieve long-term goals. Once small debts are paid off and emergency funds are created, it's important to take life, term, or medical insurance to protect oneself from contingency expenses. Once this step is completed, the individual is free to divert funds to make investments. SIPs, systematic investment plans, or debt funds for a maturity period of 3-5 years are also good options. This helps save for a period in the near future. 

#3 - Long Term Goals

Long-term goals are those that require 7-10 or more years to achieve. They need meticulous planning and execution. Examples include buying properties, retirement, and education of kids. They also need long-term investment plans, such as investments in equities. These require long-term commitment and period review.

Let us look at some examples to understand the concept better.

Example #1

Dan is a salaried employee. He wants to create an emergency fund, plan for marriage, and buy a house. Now, Dan has three major goals. It would be better if he planned according to his priorities. Creating an emergency fund would be his priority, as it creates a safety net in case of an emergency. This has become his short-term goal, which he can achieve in a matter of 2-3 years. He is working and would likely be married in a few years, and hence, that would be his medium-term goal. Being a salaried employee, the corpus amount for a house shall be immense and hence can be his long-term goal. Dan, instead of jumping on to save for a house straight away, can achieve this step by step so that he doesn't feel the pressure. This could help him achieve his goals efficiently.

Example #2 - Financial Globalization Examples in the Philippines

Let's say Jack is a student and has got his first job with a salary of $2500. He has a student debt of $25000 and wants to pay off within 5 years. Let us understand how he will be able to achieve this through the implementation of the SMART strategy. 

The total number of months in 5 years would be 60. Now, if he has to make monthly payments, he will have to spare $417 from his paycheck. 

In detail 

Specific: Paying off student loans at $25,000. 

Measurable: Save monthly 417 dollars, which will roughly amount to $5,000 a year. 

Achievable: His monthly salary is $25,000, and the intended monthly payment is less than $500, which is affordable. 

Relevant: With the level of his monthly salary, the amount of $417 is achievable, looking at his past expenses. 

Time-bound: The goal is to pay off within 5 years. 

Note: Financial goal-setting worksheets are a great help in such situations!

The importance of financial goal setting is as follows:

• Financial Understanding: It helps individuals gain perspective on where they stand in financial terms. It helps them understand if the money they make is enough, if additional sources of income are needed, or if expenses need to be cut. This step makes budgeting easier.  
• Achievement Of Financial Goals: The setting process, with proper planning and implementation techniques, will produce positive results. This will help individuals achieve their targets and buy things or experiences. 
• Stress-Free Life: Setting financial goals helps them plan for the future and anticipate ways to tackle the arising problems. This helps them lead a stress-free life and keep their medical bills at a minimum due to the elimination of stress. 
• It Fuels Savings: Understanding an individual's financial health helps eliminate unwanted expenses. This not only helps achieve goals but also avoids buying unwanted material things. It helps the environment, too! 
• Improves The Standard Of Living: The proper goal-setting process ensures the achievement of goals and the management of funds. It helps build discipline and work towards improving not only finances but also the standard of living.