We covered the first rule of money management last week, so make sure you read the article Money Management Series Rule #1 Budget Your Money before moving on to rule #2. When you have a budget in place, you are ready to move forward in the money management process. You know what money is coming in and what money is going out.
You know what is left over to save and what can be spent on extra “fun” items. The second rule of money management is to set financial goals. You may be surprised to learn that you already have goals set, even if you don’t realize it yet. We are going to cover this rule in more detail as the article continues.
Why Set Financial Goals?
With any goal, the purpose is to grow, learn and achieve things you haven’t achieved before. When you stop working towards something, you have ultimately stopped living. The same applies to financial goals. To reach monetary heights you haven’t seen before, you need to establish wealth goals and work towards them. Most people who have a lot of money didn’t start out that way. They established goals and used the money they did have to get to the next level. If you want to make something of yourself financially, setting financial goals is a must.
If your budget includes income allocation to pay off credit cards and loans, then you are already working towards becoming debt free. This should be a top goal for anyone who has debt, even if it’s manageable. Pat yourself on the back for thinking about your debts and paying them down, even if it wasn’t designated as a goal.
Have you been cutting back at Starbucks to help your waistline? Well, saving $5 every week day on a latte is putting an extra $100 in your pocket each month. Your current money habits may already have you well on your way to reaching financial goals! Take a look at your budget and see how you spend. Call out any instances where extra money is going in your pocket or you are paying down debt. Those instances are a great start to setting your financial goals.
Where to Start?
Refer to your budget and check which areas are costing you the most money. Are you spending too much money on dinners out, but only paying minimum payments on your credit cards? Do you have any money left over to save? Once you understand your current financial situation, you can start setting reasonable goals for your situation.
Everyone should start with establishing an emergency fund and paying down debt. Your emergency fund should be 6 months’ worth of expenses, should you lose your job or an unexpected expense come up. Once you have your emergency fund established, your next focus should be on taking care of debt. Start knocking out debts with the highest interest rate. Cut back on unnecessary spending to contribute to your debt payments. It’s extremely hard to save for a new car or house when your money is going to debt payments, or an emergency comes up that you can’t handle without credit cards.
Once you have your debt under control and emergency fund ready for use (in case of emergencies only), you can start focusing on the other financial goals you want to achieve. Is the next step a down payment on a house? When do you want to have the funds ready? Once you know the goal amount and the date, you can start saving to reach that goal. For example, if you want to save $20,000 within the next 3 years, you will need to save roughly $560 a month.
Don’t know when you want to reach your goal? If you know you will one day want to buy a house, start putting away money now. Even if you are only saving $50 a month, it will continue to grow until you are ready to start adding more. Get your goals written down, even if you don’t have expected timeframes. Start working towards them by saving, even if it’s a small amount.
Setting financial goals is important, but it’s just important to stay on track to achieve them. Create accounts for each of your goals and set up automatic transfers so you don’t have to worry about forgetting. Take action and be disciplined. If you shouldn’t be buying a new purse, then don’t do it! Create a goal to budget for a new purse, then buy it. You will feel better about the purchase and it will be in budget.
What are some of your financial goals? What are you doing to make sure you reach those goals? Share with the community and see what you could learn from other people’s goals! Leave a comment below to start sharing.