Every stage of life brings its own financial challenges and opportunities. We’d all like to have the luxury of throwing our extra money toward savings and retirement, but there are short-term needs that can’t be ignored: down payments for a future home, tuition for college, debts to be repaid, a new car to drive the kids around.
Most people are juggling several of these needs at any one time, which can make money management a challenge. When you’re pulled in so many directions at once, how do you prioritize your needs?
Whatever financial situation you’re in, goal-setting is the key to better money management. By setting short- and long-term goals, you can account for your full range of financial needs and create a plan for financial wellness.
Identify Important Short- and Long-Term Financial Goals
When setting goals that target financial wellness, make sure each goal has a tangible impact on your overall financial health. These goals shouldn’t be focused on luxury items such as a vacation or a fancy car; you want goals that will leave you in better financial shape than you were in before you started this process.
If you don’t know where to start, consider financial goals that will have the highest impact on your financial health. If you have credit card debt, for example, this is a great place to start: You can improve your financial health not just by paying off debt, but by reducing the overall amount of interest paid on these accounts. Plus, the reduced debt utilization could help you improve your credit score.
Prioritizing long-term financial goals right from the start is also important. If your company offers 401(k) matching, for example, you’re throwing away money every year if you aren’t taking advantage of the maximum match. By making this a focus of your saving plan, you’ll earn more over the long run.
Calculate a Monthly Budget, Including Savings
Financial goal-setting always takes place within the context of your monthly income. To figure out how you can build toward each goal, you’ll need to work out a monthly budget, including an estimate of how much money you can save from each paycheck.
Once you’ve figured out how much extra money you can apply toward savings, you can build a goal-setting plan that allocates a certain amount of your excess income to each financial goal.
Determine the Timelines Required to Reach Each Goal
Each goal will have its own timeline that affects how much you need to be saving right from the start. Retirement is an example of a long-term goal that, though important to your financial health, may not be as urgent as achieving other short-term goals, such as quickly snowballing credit card debt.
With other goals, such as paying off debt, you might be more focused on accelerating the timeline for reaching this goal as much as possible. Saving for a down payment, for example, may be more flexible depending on your financial circumstances. Or maybe you’re about to welcome a baby, and want to get into your own house as soon as possible—if that’s the case, then you’ll want to set your savings timeline accordingly.
Reallocate Your Spending as You Reach Financial Goals
Maybe you look at your savings strategy and decide you need to pay off credit card debt before you start saving for a new car. Or you might choose to make smaller contributions to your retirement fund while saving up for a home down payment. Either way, over time you should see yourself reaching short-term goals, which means you’ll have extra money to put toward other areas of need.
As you reach these milestones, re-examine your spending and decide how to best recalibrate your goals. Maybe new short-term goals are ready and waiting to be added to the mix. Or maybe you have an opportunity to devote more of your money and energy to pursuing long-term financial goals that are years in the making.
Whatever you decide, make sure your goal-setting remains focused on the cornerstones of excellent financial health: paying down debt, increasing savings, strengthening your credit score, and protecting you against unexpected expenses.
Goal-setting may be challenging for people who have struggled to stick to budgets and savings plans in the past, but this process can also be exciting. If you’re able to create a plan and see it through, you’ll be able to improve your financial wellness and dream of new goals that once seemed far away.