When it comes to living a richer financial life, saving money is important. It can be simpler to handle emergencies or fulfill your ambition of owning a home if you have money in the bank. Making savings a regular part of your financial routine begins with setting clear financial goals.
Why Financial Goals Are Important
Setting financial objectives enables you to turn aspirations into reality. Choosing a goal and creating a plan to achieve it are the first steps. For instance, the Consumer Financial Protection Bureau suggests defining goals using the SMART method. Your financial objectives must be:1
- Relevant \sTimebound
This method of outlining your financial objectives might provide you with the motivation and guidance you need to achieve them. Here is an example of a SMART goal for an emergency fund:
|Specific||What are you saving for?||An emergency fund|
|Measurable||How much do you want to save?||$3,000|
|Attainable||Is this a reachable goal?||It is if I earn more, spend less, and plan.|
|Relevant||Why is this important to you?||I need to be prepared for surprise expenses.|
|Timebound||When do you want to reach the goal?||In 12 months|
Set two savings objectives for this year.
Less is more when it comes to financial objectives. If you set too many goals, you could get hopelessly disorganized. That can make you give up before you even start.
There’s an easy way to go about setting your financial goals if you’re unsure of what to concentrate on. Select two monetary objectives: one to work for in the short term and one to concentrate on in the long run.
Short-Term Financial Objective: Increase Emergency Funds
When you encounter an unforeseen expense, having an emergency savings can save your life. 30% of Americans, according to Federal Reserve data, couldn’t afford a $400 bill in cash or its equivalent.
Saving for emergencies should take precedence over other savings objectives in the short term if you don’t have a rainy-day fund or if you’ve exhausted yours. Determine how much you need to save first.
For instance, you could want to set aside the costs for three to six months. Or you could decide to set aside a specific sum of money. Then you may break down that objective to see how much monthly saving you would need to attain it. Therefore, you should attempt to save $250 every month if you want to save $3,000 for emergencies over the course of the next year.
You may perform the calculations with a savings goal calculator like this one.
Long-Term Financial Objective: Be Ambitious
When deciding on your second financial objective, think about your goals over the next five, ten, or even twenty years. You might desire to purchase a house, for instance. So your main financial objective might be to save money for a down payment and closing charges. Alternately, you might like to save money for retirement.
Start with a specific money number when establishing longer-term financial objectives. Then, work backward to determine how much you must save each month or year. For instance, you would need to save $5,000 every year for the following four years if you wanted to save $20,000 for a home. The monthly equivalent is $416 and change (not counting interest or investment gains).
Consider where you should put your money as you create your short- and long-term financial goals. For instance, compared to a standard savings account, a high-yield savings account can enable you to increase the return you receive on your emergency money. When saving for longer-term objectives, it could be advisable to open a CD or build a CD ladder.