Establishing Short and Long-Term Financial Goals
Even if you are new to financial planning, you have probably heard about short and long-term financial goals, but many people don't realize how crucial setting goals with definitive steps to achieve them will be to their overall financial success.
The process starts with determining your long-term goals. Long-term can also mean different things to different people. A good place to start is by imagining where you would like to be ten years from now and establishing a plan for how to achieve your goals. Examples of long-term goals include:
· Retirement savings
· Paying off a mortgage, or inversely, being in a position to buy a home and take on a mortgage
· Paying off all debt
· Starting a business
· Saving for your children's tuition
Once establishing your overarching long-term goals, you can think of your short-term goals as the steps you need to take to reach your ultimate financial goals.
What are Short-Term Financial Goals
If you do not have an emergency fund, all short-term financial planning should start with establishing one. An emergency fund is crucial for avoiding financial pitfalls. If you are new to saving money, the first step is establishing how much you should have in your emergency fund.
While most experts recommend three to six months' worth of living expenses in your emergency fund, you may need less depending on your circumstances. If you do not have excessive debt and your job is secure, you may only need a months' worth of income in your emergency fund. On the other hand, if you have a family that depends on your income, you need a larger emergency fund.
The purpose of an emergency fund is to allow you some cushion if you were to lose your source of income or encounter unexpected expenses that arise in life. Without an emergency fund, those unexpected expenses often turn into high-interest debt.
Other examples of short-term goals:
· Paying off credit card debt
· Saving for a big-ticket item you want
· Home repairs and improvement
· A wedding
· Starting a retirement plan
Paying off credit cards and other high-interest loans should be a top priority on your short-term goals. Interest on credit cards can quickly escalate, and paying just the minimum due will result in paying far more than you should for goods and services. After establishing an emergency fund, paying off these money drains should be your priority.
Ideally, you should be able to save at least 20% of your income. After you have funded your emergency fund, you need to establish your goals for the money you are saving. If you are unable to save 20% of your income, you need to evaluate your lifestyle. If you are spending money on non-essentials, you can cut back to meet your savings goal. On the other hand, if all of your income is going toward essentials, with no reserves for saving, then you may need to find a way to boost your income.
Boosting Your Income to Meet Financial Goals
If you work full-time, you may have to think creatively to come up with ways to boost your income. The most obvious place to start is evaluating your job. Do you make a salary commensurate with others in your field? Do you bring an extra value that isn't being compensated? If you answered no, it might be time to ask for a raise or consider changing jobs.
If changing jobs is not the right choice for you, then explore the gig economy. The gig economy is booming, and it can almost seem like everyone has a side hustle. While it is crucial that you leave time in your life for self-care and enjoyment, many people turn their hobbies into a side hustle.
Prioritize Your Goals
The key to financial success is prioritizing your goals to make the most of your money. For example, buying a home may seem like a good idea, but if you owe substantial money on credit cards, use your money to pay down that debt first. Not only will it save you money, but it improves your chances of qualifying for a mortgage with better terms. That, in turn, saves you even more money.
Start with determining your needs, like food, shelter, and transportation. Once those things are secured, an emergency fund should be your next goal. Retirement savings, if you are not already, should also be a high priority. Once you have those things covered, you can start working on your short-term goals and using those as building blocks to reach your long-term goals.
James Schroeder is an attorney licensed to practice in Ohio, Pennsylvania, New York, New Jersey and the District of Columbia and maintains an office in Sardinia. You may reach him at (973) 886-4563 or at southwestohiolaw.com.