As we continue on our quest to become familiar with what exactly personal finance is and all that it encompasses, we move our attention now to goal setting, planning, and budgeting. This article will specifically focus on goal setting.
In my first article on the basics of personal finance, I touched on the fact that there are various aspects to personal finance and or to taking control of your money. I mentioned that you need to understand all of the components before you will have a clear understanding and direction. So don’t worry if this doesn’t make sense right now, it soon will when you have all of the information. You only have a vague idea of how the puzzle should look, as we put the pieces together the image will sharpen and it will all become much more clear.
Before I get started with this particular lesson, let me reiterate, the point of learning about personal finance is to gain the knowledge to be able to effectively manage your money as to get the most out of it, and to ultimately retire as soon as possible. With this knowledge you will know what you have to do to get to that point later on in life, and what steps you will need to take.
Without goals we have little to no direction. You have no yard stick to measure your accomplishments (or lack of) against. A person who has no goals will certainly meet them. A person without goals wanders aimlessly, only concerned with the now, often working paycheck to paycheck. This may be ideal when you’re a young teenager, but eventually, if you ever want to own a home, a car, a cool spot on the lake with a boat and toys, land, or not work until you’re 90, you will need to set goals for yourself.
My goals out of high-school were rather simple, go to college and graduate. I met these goals quite easily, however, when I graduated I wasn’t sure what I was going to do with myself. I hadn’t taken the time to actually think what I wanted to do with my degree (and when I wanted to pursue my graduate degree), so I was left trying to figure out what could I do with my finance degree when I got out. My goal was too weak and general, it had no specific time-line, it left too much in the air. I had only created one goal, and that was towards my education, I had failed to make several other goals, like finding a job, saving money for a place, defining when exactly I wanted to graduate (or when I should have graduated), and so on.
This made everything that much more difficult for me, it took me longer to graduate than it should have, I was forced to take what job I could get when I got out, I had to move back in with my parents for a few months, and worst, I was plagued by college debt. This cost me in various ways, I probably could have came out of college and got a better high paying job, moved into my own place without having to live at mom and dad’s, potentially could have been earning more money to this day, and likely would have had far more money in the bank.
Depending on where you’re currently at in life right now, you will need to set various goals. You could break these goals into short term goals and long term goals. Your short term goals should lead to your long term goals. What goals should you set? What is important to you? Who do you want to be? I can’t tell you what your goals should be, but I can tell you what they probably should look like.
Let’s take the example of a young twenty something, who is living in an apartment working their first real job. Some short term goals may include, saving enough money to buy a car and for a down payment on a house. But you must be specific and attach a date and value to these short term goals. For example, I want to save $5,000 to pay cash for a car in one year, and save $10,000 to have for a down payment for a house within two years. Longer term goals could include purchasing a house within two and a half years, begin saving and planning for retirement immediately following the purchase of my first home or within 3 years, payoff my student loans within 5 years. Be completely debt free within 5 years. Pay cash for a beach home by 35. Retire by the time I’m 40.
That all sounds great above, paying cash for a car in a year, putting a down payment for a house in 2 and 1/2 years, being debt free in 5 years, paying cash for a beach house by 35, and retiring by 40. Then reality sets in, is this even possible? It sounds too good to be true.
This is when we evaluate our goals and decide if they are feasible and what it would take to get there. If they are feasible, we move forward with a plan. If not, we change them to be more reasonable and possible. After we have strong but realistic goals, we move on to planning how we are going to do it.
The next article will teach you how to evaluate your goals to see if you can achieve them.