In the absence of clearly-defined goals, we become strangely loyal to performing daily trivia until ultimately we become enslaved by it. — Robert Heinlein
Have you ever felt trapped or enslaved by your own financial situation and/or spending habits? Anyone who’s had any financial hardships or made a later-regretted impulse buy knows what I’m talking about. “Why did I buy that when I know I really didn’t need it?” “Why do I always end up with not enough money at the end of the month?” “Will I ever get ahead financially without eventually ending up behind again?” Most of us have asked these kinds of questions to ourselves at one time or another – or at least know someone who has.
I believe one of the main causes of financial stress and yo-yo budgeting (getting in debt, getting out of debt, getting back in debt, getting back out of debt, etc.) is the lack of financial goals. I saw an episode of Oprah recently where a family was about $80,000 in debt. They met with a financial counselor, refinanced their house and were able to take $50,000 from their house and pay off quite a bit of debt. Unfortunately, when they came back on the show a year later, they were $37,000 more in debt than they were a year ago.
Once they paid off those bills, they got distracted and started spending again. The financial counselor said that they didn’t really want to be debt free – they just wanted to relieve a little pressure. Once some of the pressure was relieved, they were done in their minds. They didn’t have anything written out that told them what they were shooting for and why they wanted to get there, so they just quit.
This happens to so many people. They say “I want to get out of debt.” OK – what next? Often they will get out of debt, only to get right back in. I’ve never heard anyone say “I want to get out of debt – and after that I want to rack up more debt!” Wouldn’t it seem crazy if someone said that? Yet that’s what so many people do. They don’t have a plan for where they are going so they just end up wherever – and more often than not it’s back in debt.
Before my husband and I paid off all our credit cards, we had goals for what we wanted to do with the extra credit card payment money when we no longer had to make those payments. And before that goal was accomplished, we had another one after that. I believe that this is what’s kept us from going back into debt again. We have clear plans and goals for what we want to do with our money and while we may get sidetracked from time to time, we still have our goals to guide us.
If you don’t have any financial goals yet, I encourage you to sit down and write some out. You’ll want to evaluate what you want your financial future to look like and figure out what steps will get you there. Also, determine what your values are in relation to your finances. Do you want to be able to give more to charitable causes? What kind of lifestyle do you want to live in retirement? What purchases are important to you? What potential event could ruin your financial life if not prepared for? In addition, it’s a good idea to include specific time frames for your goals. That way you’ll be able to see how you are doing and adjust as necessary.
If you are married, this is a great opportunity to sit down with your spouse and communicate about your money and your future dreams and plans. You’ll want to make sure you are on the same page or can at least arrive on the same page because if you and your spouse have different goals for the money you share, I promise you there will be trouble ahead.
Since everyone’s financial situation is different, everyone’s goals will be different too. It’s your money (and your spouse’s if you’re married) and you can do whatever you want with it. The benefit of financial goals is making sure you get to do with your money what you really want to do, not just what you end up doing. It’s really up to you to determine what goals are best for you, but let me offer some suggestions to help get you started in the process. The priority and importance of your goals depends on your specific situation, but you can begin to set some goals and then change priorities as different needs arise:
Emergency Fund: The first thing we started saving for was our emergency savings fund. This is important because it can help save you from going into debt when the unexpected occurs. If you currently live paycheck to paycheck and maybe have to “float” bills once in a while, I would suggest this as your first step. This can give you a needed cushion when unexpected bills pop up or if you lose your job. Just remember that this should be kept stocked so if you take money out of it, be sure to replenish it or you’ll end up in the same situation.
I’ve heard many experts suggest somewhere between 3-6 months of living expenses for your emergency fund. That can be quite the chunk of change, especially if you are struggling to pay your bills. If this is the case, start with a smaller amount, like 1 month or even 2 weeks. Something is better than nothing. We broke this down into 2 years. Our goal was to save 3 months the first year (which we recently accomplished) and save an additional 3 months the next year. Since we broke it down into smaller goals, we were able to celebrate the success of accomplishing our first goal, even though we still have farther to go.
I would suggest keeping your emergency fund in a high yield savings account. We found one that offers an interest rate of over 5%. Since we don’t have debit card access to the account, it takes away the temptation to spend the money on frivolous things, yet it is still available if needed in an emergency.
Eliminate (or at least reduce) debt: An ultimate goal should be to pay off all debt. For some, this might take only a few months, but for others it could be a longer and more painful process. If you have a smaller amount of debt, you can make separate goals to pay off specific accounts (credit cards, car loans, etc.) and an overall goal to be debt free. If you have a larger amount of debt, you might want to set some goals based on a certain percentage or amount of your total debt. For instance, one of your goals may be “I/We will pay our student loan debt down $5000 this year” or “I/We will pay off 50% of our current car loan by XX date.” Reaching your smaller goals will help give you the motivation to continue onto the larger goals.
Retirement Contributions: If you are not contributing to any kind of retirement plan, your first goal may be to start doing so. If you are already contributing, perhaps you can set a goal to increase your contributions by X amount a month or to contribute a total of X amount in one year. I suggest you try and stretch yourself a little here. If you are currently saving $100 a month to retirement, maybe make a goal of $1500 for the entire year. That way you’ll be looking for ways to add an additional $300. It’s amazing how creative you can be and where you can find money when you are motivated to reach a goal.
Save for a Large Purchase: Maybe you want to buy a car in the near future. Instead of going out and obtaining a loan for a brand new one, maybe your goal can be to save up and pay cash for a car. If that goal is a little far-fetched for you, maybe you can save for a down payment of 25% or 50% of the purchase price. It will be harder than getting a loan for the whole thing, but you will have the satisfaction of knowing you saved for your car, plus you can use the money you save in monthly payments to help meet another financial goal.
Live on One Income: My husband and I are a two income family. One of our current goals is to live off of one income (his) and save the rest. Our reason for setting this goal is so that I can stay home and raise our kids when we decide to have them in the future. We try very hard not to incur any monthly payments that we won’t be able to afford on only one income so it’s not as big of a shock for us. And with the extra money we put away from the 2nd income, we are better able to meet our other financial goals.
Give More Money Away: Many people know the rewards of giving financially. First of all it is fulfilling to contribute to worthy causes that you are passionate about. Secondly, giving can help keep you from developing an attachment or over-dependence on money and “stuff.” Thirdly, when you give you are bound to receive. Something about being generous opens your life to receive blessing and increase in your life and finances. I have experienced this many times. So if you are familiar with the benefits of giving, or if you want to start, this could be another goal for you.
For those already giving, set a goal to increase your giving by a certain amount or a higher percentage of your income. Or seek out another worthy organization/person/family that you can give to. If you aren’t currently giving, make a goal to start – even if it’s only $10 a month. It may seem like a small amount, but it can make a difference. If you’re not sure where to give, do some research. You can give to your local church or community center, to help feed and shelter the homeless, to help runaway teens, to help find a cure for cancer, and the list goes on and on. Find something you are passionate about and start to see your money make a difference in the world around you and not just in your own life.
Increase Your Net Worth: Your financial net worth is your bottom line for your finances. It shows what you are really worth in financial standards. For those who don’t know, your net worth is how much you have in assets (savings, retirement, home equity, etc.) minus how much you owe – giving you the amount you really own. If you owe more money that you have in assets, you have a negative net worth. If you have more than you owe, you have a positive net worth.
Setting a goal to increase your net worth can help you stay focused on your bottom line. For instance if you pay off one bill but take out more debt someone else, that affects your net worth. If you have a negative net worth, you can set a goal to at least get in the positive. If you already have a positive net worth, set a realistic goal of where you want to be in a year or two or five.
For all your goals, I encourage you to write them down somewhere where you can review them regularly. You can post them on your refrigerator, on your nightstand, in your PDA, or wherever is easiest and most convenient for you. When you see your goals often, you are reminded of why you are being disciplined and working hard and what your future reward is. And don’t worry about choosing the perfect goal. At your goal date you may be just shy or way ahead of your goal. The point is that you are moving in the right direction and you’ll eventually get there.
Image courtesy of Rob Goodspeed