An essential part of financial planning begins with ascertaining your resources, debt, and dreams for life, which is the basis for financial goal setting. The best advice for setting long-range financial goals is to start early to have the most time to achieve them. But what about short and mid-range goals?
SMART Goals: What are they?
Start by creating SMART goals. SMART means your financial goals need to be:
- Relevant, and
SMART goals apply just as much to those goals you set for next month or next year, as they do to those you set for 20+ years down the road. SMART goals allow you to move forward, knowing exactly what has been done so far, what you are currently working on, what you are working toward, and when you can expect to accomplish them.
Your financial goals will vary based on the size of your family, your dreams, your lifestyle, and if you or your family have special needs. Prioritize your goals based on the stage of your financial plan in which they need to happen. Goal dates to accomplish will vary depending on the level of income, debt, cash, and savings you already have and how much time you have to work on them, but they will generally fall into the groups described here.
One mistake that a lot of people make is setting and achieving small, short-range goals, one after another, year after year without tending to longer-term goals. For example: "This year I'm going to save to get a 72" plasma TV, and next year I'm going to trade in my car for the Tesla SUV I've had my eye on," etc. While this may feel great at the time, it can easily get in the way of accumulating the resources needed to meet critical future financial wants and needs.
Let's define short-term goals as those that you want to achieve in two years or less. Short-range goals should include practical tasks that make it possible to move forward with future plans. These may include:
- Create a budget for current and future expenses,
- Build a cash reserve as an emergency fund (unbudgeted expenses, loss of income, etc)
- Pay off credit card debt, prioritizing small amounts with high interest
- Use cash/debit card for living expenses and necessary items
- Cut unnecessary spending from your life for at least one full year
- Set long-range goals, to keep you motivated by the big picture
If you do have "bad debt," part of your budgeting should include the built-in goal to stop using credit or to pay your credit card balance in full each month to avoid high interest (same as paying cash).
Short-range goals may also include some smaller expenditure items like major appliance replacement, a vacation budget, paying off a car loan (early if possible), or saving to pay cash for a car.
If you are struggling to overcome heavy indebtedness or a poor credit history, it may be wise to commit to some real restraint on spending in the short-term, knowing that you'll be in a much stronger position to set SMART goals that will take you where you really want to go in the future. Short-range goals can be achieved even while you lay the groundwork and get started on mid-range and long-range goals.
Though you might accomplish mid-range goals in the next 3-15 years, they could be adjustable depending on your age and resources. Consider your mid-range objectives as a bridge between short and long-term goals. Examples may include:
- Obtaining life and disability insurance,
- Paying off student loans and other loans,
- Buying a home,
- Going on a specific vacation,
- Starting a business, or
- Saving for college
SMART mid-range goals should still leave room in your budget for steady, incremental progress toward achieving long-range goals.
Long-range goals - twenty+ years into the future - have to do with paying off a mortgage, building an investment portfolio, and preparing for retirement. Set long-range goals early with an expectation that as you achieve the milestones of your short and mid-range goals, you will apply a larger percentage of your resources to reaching your long-range goals.
Work on long-range goals ideally begins in very early adulthood, but whenever you start, is the next best time! Consider the advantages to starting far earlier than may seem relevant to some young adults.
- Age-based insurance policies may be able to lock-in a low, affordable rate for the life of the policy if purchased and maintained starting at a young age. That can add up to a lot of savings, as well as a safety net for your loved ones.
- Starting a retirement fund as a young adult, even with small contributions while income is limited, will accumulate wealth much more steadily and to greater advantage than trying to play catch up when you hit your 50s, 60s, or 70s.
- Retirement fund goals should include saving 10%-15% of every paycheck and investing in tax-advantaged accounts for retirement like 401(K)s, Roth IRAs, and possibly other investments.
- SMART and strategic tax planning, with a qualified tax professional, will yield tax savings that can be converted to assets.
Paying off a mortgage is better to do in 15 years (saves lots of money), though many mortgages last 20-30 years. Freeing yourself from mortgage and student loan debt while you are still in your prime working years, will allow you to redirect those monies toward retirement and portfolio building.
Ideally, your long-range goals don’t kick in until you get out of debt since the debt interest you pay out can work against the investment interest you earn. The best situation is to avoid debt so you can invest sooner.
Your financial plan and goal setting are unique to you since your age, resources, debt ratio, and income will affect your timetable. Myrick CPA can help you develop a financial plan with the right goals for your situation, no matter how early or late in life you begin. Call or contact us online today to set up your consultation.