Setting financial goals: How to and examples

When people are asked about their "financial goals," they often provide a list of items they plan to purchase or things they plan to do, such as buying a new car, going on a cruise, making a down payment on a house, or saving for college. But there’s another way to think about financial goals: there are overarching financial benchmarks that can help you to achieve the financial stability you may want from life – and ultimately, help assist you in acquiring and doing the things you want in life. You’ll learn about:

• Why financial goals are important

• Budgeting, building savings, and other steps to achieve goals

• Increasing stability in retirement

Why you should consider setting financial goals?

Most people wouldn't set out on a road trip without knowing where they were going or how to get there. Try thinking about your financial journey through life in the same way: Unless you know where you're going and how to get there, you may end up making wrong turns, hitting dead ends, and finding yourself in places you'd rather not be. Setting goals helps you create a roadmap for your financial journey and can:

• Provide a sense of direction and purpose in managing your money and help you to stay focused on your long-term financial well-being.

• Give you specific targets to reach, which can help you to stay motivated and committed to making responsible financial decisions.

• Make it easier to prioritize your spending and saving so that you can allocate your resources to the things that matter most.

• Help you to better navigate the unexpected twists and turns that lie ahead.

• Provide benchmarks against which you can measure your progress and see how far you've come towards achieving your objectives.

• Help you to accumulate wealth and increase your financial independence.

That’s why many financial professionals say that setting financial goals can be a crucial step in managing your money more efficiently – and making the kinds of decisions that can help lead to greater financial well-being.

The SMART way to set financial goals

Almost everyone has daydreams about vague and even romantic life goals. But the key to help realizing goals can be making them as specific and achievable as possible. That’s why many financial professionals recommend using the SMART formula. If you adhere to this guideline, you will help you to set goals that are Specific, Measurable, Achievable, Relevant and Time-bound:

First, be specific about what you want to achieve and your timeframe for doing so. Set goals such as "paying off $1,000 of credit card debt within three months," “investing $10,000 each year for retirement,” or “saving a $50,000 home down payment in five years.”

Make sure that your goals are achievable based on your current financial situation. If your monthly after-tax income is $8,000, and half goes to needs like rent, food and transportation, you're not going to have the financial resources needed to save $5,000 a month.

Ask yourself if each goal is relevant to your overall life plan and aspirations – and be prepared to prioritize the things that are most important.

Finally, make sure your goals are measurable. It's may not be enough to say, "I want to have enough money to retire on"; you should try to quantify how much money you'll actually need to do that…

Applying the SMART formula can help create a clear financial roadmap and increase your chances of meeting your goals. It can also help provide a solid foundation to build a budget that will work today, along with a savings plan that will prepare you for tomorrow.

Work towards achieving short-term financial goals

Short-term financial goals should include items that can be achieved over the course of the next 12-24 months, help improve your day-to-day financial stability, and, most importantly, help you create a foundation on which to build a financial future with confidence. They include:

1. Creating a budget

If you do nothing else, consider taking the time to create a personal or household budget that reflects your current income, current expenses, and future savings goals. A budget can help you to:

• Manage money

• Organize your finances

• Reduce unnecessary spending

• Save for the future

Doing these things can go a long way to aid in increasing your financial confidence and reducing financial anxiety. These tips can help you create a workable budget, but you can start by tracking your monthly spending and comparing it to your monthly after-tax income.

2. Building an emergency fund

In addition to your regular expenses, there is always the possibility that less predictable costs might arise. These might include:

• Car repairs

• Home maintenance

• Higher-than-normal health care costs

• Emergency travel

These are the types of unexpected expenses that can be covered by an emergency fund, which you can build gradually by setting aside a small amount of money each month. Be sure to factor in this outlay when calculating your budget.

3. Managing your use of credit

Managing your use of credit – especially credit cards - is crucial to effectively managing your household or personal finances. It can also help to unlock new financial opportunities. An established credit history and a decent credit score aid in demonstrating financial responsibility and can make it easier to qualify for loans, mortgages, and credit cards, secure more favorable interest rates and insurance premiums, and may increase your chances of becoming employed.

To build credit and improve your credit score:

• Try to pay bills on time

• Pay more than the minimum payment

• Keep credit use as far below your credit limit as possible

• Maintain a diverse mix of credit accounts – not just credit cards but things like student loans, personal and automobile loans, and a mortgage

• Check credit reports for accuracy and address errors promptly

Work towards achieving medium-term financial goals

Once your day-to-day finances are in order, you should look towards the foreseeable future and consider a second set of goals, including:

1. Saving and investing

One of the best ways to boost your financial confidence can be to save money for the future. Even if you can't allocate much money to savings, most financial professionals would urge you to start as soon as possible. If all you can afford to set aside is a small fraction of your income, it may still be worth doing. And it's not just for mid-term financial goals: Whether you're saving for a summer vacation, a down payment on a home, or long-term goals such as retirement, consistent, committed saving can yield significant benefits over time.

You can start by setting up a dedicated savings account specifically for your emergency fund and your short-term goals. These accounts are low-risk and easily accessible, allowing you to deposit and withdraw money as needed. For retirement savings, try to make use of tax-efficient accounts such as 401(k)s, Individual Retirement Accounts (IRAs) and Roth IRAs. These accounts can offer benefits like tax deductions, income tax-free growth, and income tax-free withdrawals, depending on the type of account.

If you anticipate the need for faster wealth accumulation, you may also want to consider building an investment portfolio containing higher-yielding vehicles. But higher return usually means higher risk, so take some time to learn about the markets before you begin, or consider consulting a financial professional.

2. Paying down existing debt

Carrying too much debt can be a financial burden. It can limit your ability to meet your day-to-day expenses or to start saving for the future – especially during periods of high-interest rates. So, if you're carrying a lot of credit card debt, student loan debt, or a high-interest auto loan, you may consider trying to pay them down. You may also want to consider consolidating or refinancing your debt at a lower interest rate. But be aware that there can be downsides to refinancing certain kinds of debt, such as a federal student loan, so consider speaking to a financial professional for assistance.

3. Purchasing life and disability insurance

If you have a spouse, partner, or children – and want to protect their financial confidence in the event of your death – you'll want to consider life insurance. Typically, the younger and healthier you are, the more likely it is to be approved for life insurance and the lower your premium may be. Whether term or permanent, life insurance pays an income tax-free death benefit to help your dependents handle living expenses and meet future goals in your absence.¹

If you think about it, your ability to work and earn income over time is likely your most important financial asset. You may want to consider disability insurance – whether you have dependents or not. Disability benefits can replace a portion of your lost income if you cannot work due to a covered illness or injury. Many employers offer short-term disability coverage as an employee benefit. Some also offer the opportunity to purchase long-term disability insurance at a group rate. If you're self-employed or your employer doesn't offer these coverages, you can purchase disability coverage from an insurance company such as Guardian.

Work towards achieving long-term financial goals

For most people, a long-term financial goal is financial confidence in retirement. And while that objective may be far in the future, the sooner you start planning and saving, the better. These basic retirement tips may seem obvious, but it can be a good idea to keep them top of mind regardless of your age or how much you’ve saved to date.

1. Don’t underestimate how much you’ll need

Many people overestimate how much of their retirement expenses will be covered by Social Security benefits or pensions -- or underestimate the impact of things like medical expenses. As a result, they underestimate how much they'll need to save. Try to come up with a realistic number or talk to a financial professional if you need help doing so.

2. Set clear retirement savings goals

Take the time to estimate how much you'll have to save to retire at the age you want and in the lifestyle you want. Remember: it helps to create financial goals that are clear and measurable.

3. Start saving sooner rather than later

Begin saving for retirement as soon as possible. Building your balance sooner can help you take advantage of compounding interest or potential investment gains over time.

4. Use tax-efficient retirement accounts

The tax benefits offered by an individual retirement account can help your savings grow faster. If your employer offers a 401(k) plan, you should consider taking advantage of any matching contributions offered. Also, consider supplementing your savings with cash value life insurance and other tax-efficient vehicles, especially if you're maxing out contributions to other accounts.²

5. Make consistent contributions

Create a savings plan and stick to it. Making regular contributions to your retirement accounts can help with consistent growth and keeping your savings goals on track.

6. Review your progress regularly

Review your retirement strategy at least twice a year, adjusting contributions and investments as needed to stay on track.

The sooner you begin saving for long-term goals, the more likely they are to remain achievable, instead of turning into unreasonably large short-term goals. Planning for retirement – and other sizable expenditures such as sending a child to college – can help make your life's financial journey smoother and easier. And remember, if you need guidance along the way, consider reaching out to a financial professional.

Guardian can help you reach your financial goals

Setting financial goals is one of the first steps in your financial journey. If you need guidance moving forward – on issues such as a retirement strategy or using life insurance to protect your family’s future - Guardian can help. To find a Guardian financial professional near you, just fill in your zip code and click below.

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