Saving is about setting aside money for the future. But it’s just as important to know what you’re saving the money for. That’s why it’s a good idea to have financial goals. Specific goals can help you stay focused and target your savings.
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How to define your financial goals
Thinking about financial goals can feel both exciting and overwhelming. It can be hard to know where to start. Defining your financial goals can help because you have a set list of things you want to achieve with your savings. Follow these tips to define your financial goals:
1. Write down your goals and choose your top 3
A great first step is to simply write down your ideas. Consider not just what you want to achieve, but why it’s important to you. Knowing what motivates you will help you build the kind of life you want.
You may find that you have many things to save for — perhaps more than you can reasonably save for every month. When you first start saving, choose your top 3 financial goals.
Use this worksheet to help you define your financial goals
2. Start small
When you first start saving, don’t worry about how much you can put away. The important thing is to get started. Even putting aside $20 a week is a helpful habit to get into. If you can, set up automatic deposits into your savings accountSavings account A bank account intended for depositing funds. Pays interest and lets you withdraw cash at any time.+ read full definition.
Start small, and don’t dip into your savings unless it’s an emergency. You’ll need that money to reach your goals.
3. Be as specific as possible
Try to be as specific as possible when forming your goals. For example, if one of your goals is to take a dream vacation around the world, write down which countries you want to visit, how long the trip will last, and how much you think it will cost. Will you travel solo or with a friend or partner who will shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition some costs?
Getting specific about what you’re saving for will help you come up with an accurate dollar amount. It will also help you stay focused on reaching your goal.
4. Rank your goals in order of importance
After setting your goals, you may find that you have goals that conflict. For example, many parents find themselves choosing between saving for their own retirement or their children’s education. If you’re in this situation, ask yourself which would cause more harm: not enough to live on when you retire or not paying for your children’s education?
If you must choose between two or more goals, ask yourself which goal causes the least harm if you don’t reach it. Sometimes you have to set one goal aside to reach a more important goal, even if it’s just a temporary adjustment. You may also choose to save for both your retirement and your children’s education by putting away a little less for each goal.
Also, remember it’s likely that your situation will change. If you have to prioritize your goals now, it doesn’t mean you will always need to make the same tradeTrade The process where one person or party buys an investment from another.+ read full definition-offs in the future.
5. Review your top goals annually or as things change
Change is normal. You may switch jobs, get married, or move to a new city. Any significant life change will have some effect on your budgeting and savings habits.
Take this opportunity to review your savings goals, either once a year or when you’re going through a personal change. Adjust your savings goals if you need to.
Use this calculator to figure out how much you need to save to reach your goal.
What are good reasons for saving?
There are many reasons to save for your future. Some examples of why it is good to save include:
- Handling surprise bills and emergencies – If you have savings, you can better deal with unexpected events without taking on debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition. It can help reduce stress, if you can cover the cost of an urgent car repair or get by for a few months if you are between jobs. Any financial cushion is better than none.
- Having more personal choices – Having money set aside can make it easier to make major life changes. Savings can help you launch new opportunities such as starting your own business, studying part-time or full-time, or moving to a new city.
- Reaching short-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition goals – Buying a kitchen renovation or a dream vacation may take more than a couple of months to save for. But you can reduce or eliminate the need for taking out a loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition if you set aside money each month for short-term goals. Consider anything that you’d want to achieve in less than three years to be a short-term goal.
- Reaching long-term goals – If you haven’t thought about retirement planning, now is a great time to start. The sooner you start, the longer time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition you’ll have to save or investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition the money you’ll need for an enjoyable retirement.
- Helping family and loved ones – Do you want to support a sibling starting their own business? Will you need to plan for an aging parent living with you one day? Having money saved may help you prepare for these things.
Knowing your financial goals can help you keep your savings on track. It’s a good idea to:
- Write down your goals. Remember you can have more than one goal.
- Start small and build your savings habit.
- Be as specific as you can. This will help you know how much you need to save.
- Prioritize your goals if they conflict.
- Revisit your goals every year.