Goals, values, and attitudes affect financial decisions and are integral (but not always stated) parts of budgeting.
Budgets on paper may be limited to income and fixed expensesExpenses that do not generally change from month to month (e.g., rent, car payment, health insurance, union dues, etc.). and variable expensesExpenses that vary from month to month (e.g., auto repairs, utility bills, food, phone service, etc.). , but they also reflect the goalsIn terms of personal finances, any future plans or objectives that require specific financing, such as purchasing a house or paying college tuition. and values you hold. Values, for example, will influence a person’s charitable givingProviding a gift in the form of money or goods to a public or private nonprofit organization. — the amount given to a religious group, an AIDS charity, an environmental cause, or a family member in need. The values a family holds about education influence the amount saved and spent for education costs, preschool through college. And values influence the amount saved and spent for special expenses, like annual vacations, graduation gifts, weddings, or monthly checks mailed to relatives living far away.
Setting Financial Goals
The first step towards achieving financial security is to have money easily available in case of an emergency. Set aside 10% of your income each month until you have at least 3 months’ worth of expenses set aside.
Setting financial goals is an important factor in managing money wisely and establishes a “framework” for saving and spending decisions. Early long-term goal setting, saving, investing, education, training, budgeting, and wise spending decisions are factors that will help make your future scenario possible.
Financial goals are usually categorized as short-term, intermediate, or long-term. A long-term goal of home ownership could entail both short-term and intermediate-term goals; for example, how much to save each month toward a down payment for a home to be bought in five or more years.
Examples of financial goals (short, intermediate, and long-term):
- Buying a house ten years after graduation (long-term).
- Saving ten percent of income every month (short-term).
- Saving to buy a hybrid car in two years (intermediate).
- Paying off all student loans within five years of graduation (long-term).
- Starting a solar technology business within ten years.
How to Reach Your Goals
- Identify your Goals
- Make a list of your goals. They can be short-term goals such as a saving for a vacation or long-term such as saving for a new home.
- Make a Plan
- Estimate how much your goal will cost and how long it will take you to save for it.
- Start Saving
- Cut down on expenses and put the extra money in a savings account.
Start by identifying your goals. Again, they can be as short-term as saving for a summer vacation or as long-term as saving for a new home or your child’s college education.
Once you’ve listed out your goals, estimate how much your goal will cost and when you would like to achieve it by, then work backwards from there. Dividing the cost by the time frame (in months) will give you the amount that you will need to set aside each month in order to attain your goal. For more information on calculating what it takes to reach your savings goals see the Saving and Investing section.
Consider the major decisions that you will have to make to reach your future financial scenario. Weigh the opportunity costsThe cost of passing up the next best alternative when making a decision. and trade-offsGiving up one want in order to satisfy another. of these decisions and consider what is most important to you. The factors effecting these decisions are further discussed in the following topics.
For short term goals, incorporate the estimated cost into your monthly or yearly budgetA budget is both a spending plan and a list of spendable funds. as a new expense separate from your regular savings and start saving now. This may mean trimming some of your variable expenses, or paying down some of your debts first to free up a little bit of money to put towards your goals. With your future vacation in mind, this should be much easier.
For longer term goals, (ie. The house or the college education) consider the benefits of the interest you could earn in a savings account. For more information on growing your money, see Saving and Investing.
Once you have your goals outlined, start taking steps to achieve them. Aside from cutting your expenses, consider ways you can increase your income. This is not only salary and wages, but money received as gifts, allowances, royalties, or profit from a business or rental property.
In general, in order to meet your financial goals it will be important to decrease your overall debts. For more information on prioritizing your debts, see Credit and Debt.
More Than a Budget—A Personal Financial Plan
Now that you have considered your economic future for the next five to ten years, outlined your goals and considered the trade-offs and opportunity costs involved, it’s time to write your own personal financial plan. Writing your plan will help you to see the big picture and can help to motivate you when you are feeling discouraged.
What to include in your personal financial plan:
- ways your income can be increased to attain goals.
- a scenario about your own financial life in five or ten years.
- a list of your goals, your monthly and annual budget, and an outline of your saving and investmentProperty or other possession acquired for future financial return or benefit; also a commitment of time (e.g., to education or training). strategies.
- also consider including a statement of net worthTotal assets minus total liabilities. , and your income and expense records.
What decisions related to saving, investing, education, jobs, business or careers will help you reach your goals?
Remember there will be unplanned life events (layoffs, divorce, extended illnesses, accidents) that could hinder you from reaching your goals. Start saving for that emergency fund and have a back-up plan!
The following topics, Credit and Debt, Saving and Investing, and Protecting Your Assets, will help you to develop an idea of your financial goals and to put together the components of your own personal financial plan.