What are Financial Goals?
Financial goals are targets set by an individual to achieve financial milestones or plans. In other words, they are financial objectives that an individual wishes to accomplish within a certain time frame. For example, it could be setting up a fund for their children’s education, travel, emergency, health care, etc.
Setting financial goals can help individuals maintain strict discipline while spending. It also encourages savings to attain those goals within that period. In addition, it helps individuals make conscious and informed decisions, especially on investmentsInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more. These goals also give people more control of their financial decisions and future.
- Financial goals are objectives individuals set for themselves to attain certain monetary milestones.
- Individuals may have different goals, such as repaying a debt or loan, pursuing further education, taking a vacation, or retiring.
- The investing approach will change depending on how long individuals can keep their money invested. However, the majority of goals fall into short-term or long-term categories.
- It should be SMART- specific, measurable, attainable, achievable, realistic, and time-bound for a goal to succeed.
- It is a key to achieving personal financial success. In addition, they assist individuals in maintaining investment discipline, Savings, and systematically achieving life goals.
Financial Goals Explained
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Financial goals are objectives set by an individual to realize their monetary goals in life. Setting financial goals is a key component to attain financial freedom. Each individual individual’s personal financial goals are different from another. This is because each individual has unique values and aspirations in life. Financial goals planning is the first and most important step toward a safe financial picture in the future.
The planning includes thoughts about the actual earningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more, expenditure, investments, and savings. Analyzing all of these components can help in creating a financial plan. A good plan estimates the current financial position of the individuals and the requirements if they are short-term or long-term. The plan then lays out a clear-cut path, i.e., the ways and means to achieve them.
The goals of individuals may vary, such as paying off a debtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more or loanA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more, going for higher studies, holidays, or retirement. But proper planning is the key to achieving their targets. Therefore, financial goals planning involves calculating the amount of savings, insurance [medical or otherwise], tax planning, retirement planning, and management of related factors. Apart from personal financePersonal Financing is a way of saving, investing, and growing an individual's money. It can be for an individual or a family as a whole and requires some level of financial literacy such as tax laws, investment opportunities, etc.read more, people can also plan financial goals for a business with financial targets in mind, such as where they want their business to reach. The money to be saved for any objective is its potential value, determined by the present cost, inflation rate, and time until the goal is reached.
Short Term Financial Goals
Short-term goals are those that a person needs to achieve in less than three years. They can be regarding creating funds for student tuition fees or buying a car. The focus here should be on safety and liquidity. Banks and credit union accounts can be good options to invest in as the money invested will not lose much value in six months or a year. In addition, they come with easy liquidity. On the other hand, interest rates on savings accounts on deposit may not beat inflation over the given period, even with high liquidity. T-bills [Treasury billsTreasury Bills [T-Bills] are investment vehicles that allow investors to lend money to the government.read more] are a safe option when it comes to short-term goal investments as they have a maturity period of 13 or 26 weeks. Fixed deposits are an option, but individuals must approach them cautiously because early withdrawal incurs a penalty.
There is also another category called mid-term goals, which are goals with an achievement target of three to ten years. For example, buying a house or investing in stocks are intermediate goals as these goals need time to reach the required amount of money. These goals may not have everything in place, but the individual looks forward to accomplishing them soon.
Long Term Financial Goals
Long-term goals are goals that require more than ten years to accomplish. The most common example of a long-term goal is retirement plans. A person makes their retirement plans for 10 or 15, or 20 years ahead of time. The amount gathered should help individuals live their lives post-retirement without going out and searching for work. There needs to be a continuous or steady source of income to meet their day-to-day requirements. Therefore, it is important to make the money work, and the rate of interest acquired should surpass the inflation rate. This factor is crucial as the value of an investment should go up to benefit the individual.
At the same time, there should be room for the principal to grow. Multiple streams of income or passive incomePassive income is the cash flow generated by an individual with minimum or no effort at regular intervals. It gives them additional financial security while requiring some amount of hard work initially, such as maintaining rental properties, making investments, upgrading products, etc.read more can help individuals meet their long-term goals. Proper planning and management of short-term goals are important to achieving long-term goals. Long-term financial goals require diligent planning, execution, and patience.
How to Set Financial Goals?
SMART financial goals are the key to a perfect plan. SMART is an acronym that stands for specific, measurable, attainable, achievable, realistic, and time-bound.
#1 – Goals should be specific
Questions such as why the individual wants to achieve the goal, what the individual needs to accomplish to reach that goal, and when the individual wants to achieve that goal require answers.
#2 – Goals should be measurable
There should be a measurement of progress to note how far the goal has reached its fulfillment. This will show the individual if they are on track. Individuals must answer questions such as the quantity, point of achievement, and progress indicator. For example, suppose the goal is to save $1000 in 10 months. The end goal of 10 months is the point of accomplishment. The quantity is $1000, and the progress indicator shows a saving of $100 each month until the completion of ten months.
#3 – Goals should be attainable
Financial goals can be challenging, but they should not be absurd to not be achievable. For example, suppose an individual has a $30000 monthly salary. That person’s goal should not be to save $40000 a day.
#4 – Goals should be realistic
Individuals can only accomplish any goal or purpose if it is realistic. Therefore, the following questions must be answered when developing a strategy:
Is the goal within reach?
Is it attainable with the available resources?
Will the individual be able to be committed until it is reached? etc.
#5 – Goals should be time-bound
Financial goals are meaningful when they are time-bound. For example, saving $1000 is the goal. Saving it by when? Ten days or ten years? These questions are important, especially when the goal is for the long term. It sets the tone for the methods employed to accomplish it.
Examples
Take a look at the following examples for a better idea :
Example #1
Dan has an annual salary of $100,000. He wants to save some money.
The financial goal-setting should be SMART :
Specific: He wants to save $10000.
Measurable: He wants to do it over ten months. That would amount to $100 a month.
Achievable: Choosing to save $1000 a month is doable as his estimated monthly salary will be $8333. If he had decided to save $100,000 per month to reach his goal, his one-month salary would be less.
Relevant: If Dan earned $100,000 per year, saving $10,000 is doable, and the decision would have been based on his spending habits, making it relevant.
Time-bound: Because it has to be completed in 10 months. It is time-bound; if it had to be completed in 5 years, the amount that has to be saved would be less.
Example #2
Below are Robin’s inputs, who wants to take out a retirement plan.
Robin’sRobin’s age is 30, Retirement age is60, life expectancy is 80, and expected social security per month is $1800, with no other sources of income. The average investment rate is 5%, the inflation rate annually is 6%, and income stands at $50000 a year. Therefore, income is needed after retirement, assuming the current lifestyle is maintained at 75%.
Savings Needed at 60= $2,023,783
Equivalent Purchase Power Now=$352,361
Lifestyle after retirement is similar to the current lifestyle of Robin
Following one of the savings plans below will help Robin accumulate $2,023,783 at the retirement age of 60.
If money is saved every month until 60
Amount to be saved every month= $2,376.01
Total Principal=$875,365
Total Interest = $1,148,418
Frequently Asked Questions [FAQs]
How to achieve financial goals?
After analysis, financial goals can be divided into short-term, long-term, and medium-term goals. Then, steps have to be taken in order to move closer to the goal within the time frame. This can involve planning, saving, and investing.
Why is it important to set financial goals?
Financial goal planning is important as it is key to personal financial growth. They help maintain discipline in investment and help individuals accomplish life goals systematically.
What is a good financial goal?
A good financial goal should be SMART. It should be specific, measurable, attainable, achievable, realistic, and time-bound. SMART financial goals tend to find more success.
What are the financial goals for a business?
Financial goals for a business include the vision and mission of that business but more in monetary terms. For example, expanding the company is a normal goal but growing the business into a billion dollar business or generating a billion-dollar revenue is a financial goal for the business.
Recommended Articles
This has been a guide to Financial Goals & its definition. We explain its planning, examples, and how to set long term/short term financial goals. You can learn more from the following articles –
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