Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Reaching goals and achieving personal ambitions are major objectives of the financial planning process. In order to make plans for the future, you need to know where you are today and where you want to be in the future. Thus, financial goal-setting is very much like planning the itinerary for a vacation or business-related trip. You need to know a starting point and ending point, the time frame for “traveling” (or reaching your goals), and an estimated dollar cost.
Having trouble setting financial goals? You’re not alone. On the Rutgers Cooperative Extension Financial Fitness Quiz written financial goal-setting always generates a low average score, which means that it is not performed frequently. Perhaps it is fear of the unknown, lack of time, or simply not knowing how to get started. The remainder of this article describes some small simple steps to begin the process of financial goal-setting.
One way to get started is to make a “Bucket List,” something that actors Jack Nicholson and Morgan Freeman described in the movie by the same title as a “list of things you want to do before you kick the bucket.” Many people think they have to write down a nice round number of future goals such as 25, 50, or even 100 different things to cross off before they die. However, any sized list is fine and it is definitely less intimidating to start with a small number of action items.
Once you write your “bucket list,” you can begin to convert your dreams into financial goals by making them specific and measurable with a date and a price. After that, you can determine what you need to save to achieve your goals. For example, if you have “take a vacation in Hawaii” on your bucket list, your written financial goals can describe when (e.g., 2013) and at what cost. For example, if the trip will cost $5,000 and you want to go to Hawaii in two years, you need to save $2,500 per year or almost $100 bi-weekly.
Bucket lists and written financial goals should always be viewed as flexible documents. They’ll change with time as your interests and life situation change. Not everything that people write down on a list of things to do involves saving money. Some personal ambitions involve improved health status, maintaining or improving relationships with others, philanthropy, or community service. Even some of these goals may have a financial component, however. For example, spending or donating money that was previously saved and buying healthier food. In other words, many life goals (“bucket list” items) have a financial foundation of some sort, whether it is saving, spending, or donating money.
For people who enjoy making lists of things to do (e.g., errands at home or assignments at work) and crossing items off, achieving written financial goals will be particularly satisfying. Some goals may be easier to achieve (e.g., save $400 for a smart phone) while others will be harder (e.g., retire with “X’ dollars saved). Once financial goals are written down, they can be prioritized in order of importance
A Cooperative Extension educator, Luke Erickson from Idaho, described the process of financial goal prioritization this way. Think of budgeting as building and maintaining a boat, something that keeps you afloat. Think of written, prioritized financial goals as a motor you add to your boat to provide motivation, direction, and “horsepower” to get somewhere worthwhile.
Want to be wealthy? Write down your financial goals, prioritize them, take action to achieve them, and review and revise them periodically as you develop spending plans (budgets) for the months ahead. In other words, make financial goal-setting part of the budgeting process. If you know what you want to achieve and treat savings for financial goals as a fixed “expense,” you’ll be more likely to achieve success.