Personal Finance

Developing Smart Financial Goals

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In this article


  • It's important to put aside money for unexpected expenses, such as car repairs, medical bills and unexpected layoffs.
  • Your savings goals should be based on your personal situation and not on what other people do with their finances.
  • Having an emergency fund may help you avoid putting unexpected expenses on credit cards, saving you money on steep interest rates.
  • Your income, account balances, and debt load are likely to change as you age, making it important to review your financial goals regularly.

Money might not buy happiness, but it can help you feel more secure. If you have cash on hand, things like flat tires and unexpected medical bills aren't quite as worrisome. Therefore, setting financial goals may help you weather financial emergencies of all sizes.

Once your financial situation is stable, you can focus on long-term goals, such as saving for retirement or investing in mutual funds. Here are a few things to consider as you plan your financial future.

How to Prioritize Savings Goals

Think of goals as navigational tools. When you have a goal, you know exactly where you're going. You also have a chance to figure out the best way to get there. The same principle applies to financial goals.

It's common to have multiple goals at the same time. For example, you may be working on building emergency funds, paying off a credit card and applying for an auto loan all in the same year. If you have multiple goals, you need some way to prioritize them.

The first step is to review your financial situation and determine which goal is most important to you. If your vehicle is on its last legs, you may want to put your other goals on hold and focus on saving up for a down payment on a new one.

If you recently drained your bank account to pay for car repairs, you may want to rebuild your balance before you focus on anything else. It all depends on what you have going on in your life.

As you create your goals, you may want to separate them by wants and needs. Food, housing, reliable transportation and medical care are examples of needs. You can't live without food and medical care.

In contrast, wants are things you could do without. You may want a $200 pair of sneakers or a reproduction Tiffany lamp, but you don't need them to maintain your health or personal security. Keep your wants and needs in mind as you set your saving goals.

What is an Emergency Fund?

An emergency fund, or emergency savings, is an account with money set aside to cover unexpected expenses. If you don't have emergency savings, you may have to apply for a loan or use your credit card to cover an expense.

For example, if you get a flat tire and don't have enough money to cover the bill, you may have to apply for financing. If you have money in an emergency fund, you can use it to cover the cost of a new tire. You won't have to open a new credit account or drive up the balance on an existing account, making it a little easier to manage your financial obligations.

If you’re wondering how much an emergency fund should be, experts recommend setting aside 3 to 6 months' worth of your expenses. If you don't have a lot of money left over after you pay your bills, it may be tough to save that amount. It's okay to save a little at a time.

Prioritize Long-Term Financial Goals

It's good to have short-term savings goals, but it's also important to plan ahead for the future. Once you build your emergency fund, don't forget to look ahead to what you might want to do in a few years.

For example, if you're currently renting, you may want to save up a down payment for a house. If you're a little behind on your retirement savings, it's okay to focus on your retirement accounts once you've met your immediate financial needs.

Contribute Separately to Short-Term Saving Goals

If you keep all your money in the same account, it's a little harder to keep track of your progress. For example, if you're trying to save $1,000 for your emergency fund and $500 for car repairs, you may not be able to tell how much you have saved for each goal if the funds are all in the same place.

To prevent this from happening, consider creating a separate account for each type of goal. Some banks even allow you to create online "envelopes" or "buckets," making it easier to allocate your funds to different goals.

Reassess and Adjust Savings Goals Regularly

Change is a natural part of life. You may move up in the ranks at your company, earn an unexpected bonus, develop a chronic health issue, or bring a child into the world. Major life changes are likely to affect your financial situation, so consider doing a monthly or quarterly budget review to determine if you need to update your goals.

For example, if you're expecting your first child, you may need to save up for nursery furniture, baby clothes, and medical expenses associated with the pregnancy. A chronic medical issue may increase your annual health care expenses. Reviewing your budget provides an opportunity to figure out how much you need and think of ways to reach your new goals.

Build Wealth and Create Retirement Savings Goals by Age

Once you have your short-term financial situation under control, it's time to think about the future. The United States has an average life expectancy of 76.4 years, so your retirement may last for a decade or more. Planning ahead may give you the freedom to enjoy retirement instead of continuing to work into your 70s.

To make the process a little easier, consider setting retirement goals based on your age. If you're in your 20s, now is a good time to learn a little more about the retirement accounts available to you. Your employer may offer a 401(k), a 403(b) or some other type of retirement plan. If you're self-employed, a traditional IRA, a Roth IRA or a self-employed 401(k) account may be right for you.

Your earnings tend to be lower in your 20s, so focus on learning as much as you can about retirement planning. Aim to have at least your annual salary saved by the time you turn 30. If you earn $40,000 per year and start saving when you're 20, you'll need to save $4,000 annually. As you age, continue making regular contributions to your retirement accounts.

Whether you're saving for a new car or planning ahead for retirement, it's important to set realistic financial goals. Building an emergency fund, prioritizing long-term savings and adjusting your goals as you age may help you build a strong foundation for your finances. Remember to review your financial goals regularly to determine if you need to make adjustments based on changes in your employment situation, family status or overall health.

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