Setting financial goals and creating a budget isn’t good enough. You have to be setting realistic financial goals and a budget you can keep.
This article on setting financial goals continues to be one of the most popular on the site so I thought I would revisit it and add some details I’ve picked up since it was first published. I used it to start our five week personal finance fix series, a series of articles highlighting the most important topics in personal finance and how to get back on track even if you stray from your financial goals.
Don’t forget to check out the rest of the articles in the series:
Week 2: Investing Basics and Beyond
Week 3: Getting to Sandy Beaches and Realistic Retirement Planning
Week 4: 16 Easy Money Tax Tips for Year-Round Savings
Week 5: How Much Insurance do I Really Need?
Week 1 – Setting Financial Goals and Budgeting
Wow! Is he really going to start off the personal finance series on setting financial goals and budgeting?
I know. Sorry, right? I guess I could have started the series off with something sexier like investing but I really believe budgeting and setting financial goals is where it should all start.
Budgets are like diets. We all know that we need to follow one and we all try from time to time. Unfortunately, we’re about as successful at our budgeting as we are on our diets. Why? Because we set unrealistic financial goals and don’t build the support we need to succeed.
This first week’s personal finance plan is going to change all that, for budgeting anyway. I’m afraid you’re on your own for dieting.
Setting Financial Goals and a Realistic Budgeting
Before you read too far into my personal finance series, I’ve got a confession to make. I was a financial mess in my early 20’s. I had just graduated college with degrees in finance and communications, albeit delayed from military service, and had landed my first real job as a financial reporting analyst at a large insurance company.
I am a Type-A personality and love to plan, so I started planning my financial future. I got hooked on the idea of early retirement and sipping piña coladas on a beach somewhere. I set my goals high and when I beat them, I set the bar even higher.
I was working a part-time job, socking every penny of it away and learning everything I could about investing.
I was going to be rich!
Then came the crash. Not a stock market crash, but an emotional and physical crash from burnout. I was burning the proverbial candle at both ends. By setting financial goals that were impossibly high, I forced myself into a rat race with no finish line.
In my burnout, I went on a spending spree and quite or cut back on hours at my part-time job. I ended up spending half of the extra money I had saved.
What’s worse, this cycle went on for more than a year. I was the financial equivalent of a yo-yo dieter. I would spend four to six months diligently saving only to blow it all in a month. It was only after talking to a friend about my cycle of financial manic-depressive disorder that I was able to see the problem.
It isn’t enough to set financial goals, you have to set realistic financial goals.
Very few people get rich quick in this life. The ones that try usually end up back where they started or even worse off. Use the four points below to set realistic financial goals and priorities for yourself.
1) Focus on the Big Four Financial Goals
Don’t sweat the petty stuff when planning your financial future. The future is so uncertain that planning for the big stuff is hard enough. For most people, this means: buying a house, saving for retirement, helping to pay for your kids’ education and building a financial cushion for emergencies.
- These goals don’t all come at the same time so it’s helpful to create some kind of a timeline for your financial needs. Your emergency fund is an immediate need but you should have years to save enough for your other financial goals.
- The general answer for an emergency fund is at least three months of expenses but after the last recession where a lot of people experienced unemployment for years, many are suggesting at least six months of expenses.
- The average cost of tuition and fees for the 2013-2014 school year was $8,893 for state residents at a public school and upwards of $30,094 for a private college. Don’t forget to add in inflation when figuring out how much education might cost in the future.
- How much to save for retirement is the million-dollar question, literally for some. You won’t have all your current expenses in retirement, most people usually budget around 80% of their current spending.
- Buying a house is a toss-up. There are a lot of advantages but you can do just as well putting that money to investments and renting. If you decide to save for your own home, be reasonable about your needs. Will that extra thousand square feet make you any happier or can you be just as happy with a little less?
The important thing when setting financial goals is to write it all out. Make a promise to yourself to meet your important financial goals.
2) Be Prepared for Setbacks and Know how to Handle Them
Nobody is financially perfect and you won’t be either. Understand that things will come up that set you back every once in a while. As long as it doesn’t become a recurring event that you could have easily avoided, don’t beat yourself up too much when it happens.
Avoid high-risk investment schemes and do not commit more than 10% of your total wealth to any one investment. Having a diversified portfolio of investments can help from getting set back too far when the financial markets sour.
3) Build a Support System around your Financial Goals
One of the most important ideas in budgeting and setting financial goals is a good support system. Some of those poor financial decisions caused by behavioral traits that we all share but have a hard time seeing in ourselves. Start a group that meets once a month to talk about setting financial goals and challenges you’re facing. At minimum, talk with a friend or someone that’s not afraid to give you their honest opinion.
It was this idea that helped me get beyond my cycle of financial yo-yo dieting and I highly recommend it to everyone.
4) Are you Only Living for Tomorrow?
There is a limit to what you should sacrifice for your financial future. Notice that nowhere in the big four things for which to save is living a better life. Why?
Because you should be doing that now! Life is too short to be spending every waking hour planning for the future. Work happiness into your budget so you can reach your financial goals and still live life!
If you’re having trouble putting numbers on your financial goals or just want some professional help, I’ve used Personal Capital and their team of dedicated advisors. Beyond the advisors, the site also offers free financial tools like a retirement planner and an investment checkup.
Click through to visit Personal Capital and join for free.
Building a Budget You can Keep
Now that we have a better idea of our priorities and sensible financial goals, we can start seeing how to get there.
Before you begin your budget, you might want to check your credit report and credit score. I check my report annually for free but was surprised recently when I checked it again and found a few debts that I had forgotten to put in my budget. Not budgeting for these could have thrown the entire process off so it’s important to know where you’re starting.
I use Experian to check my credit report and monitor my credit score when I can’t download it for free. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
Budgets are tough to keep. I’ve dropped my share. The great thing about budgeting is that it really doesn’t have to be forever. Most people set their budgets with no timeframe in mind. They follow their budget for a few weeks, maybe even a month but quickly lose interest because they’ve got nothing to look forward to.
Don’t plan on budgeting forever! Start with a three-month plan. This will give you an end in sight and will help you stick with the plan. After three months, reevaluate your expenses and set a longer-term budget for maybe six months. The idea here? It takes about 66 days to form a habit.
That’s just over two months so even if you only make it through your three-month budget, you will have formed some great budgeting habits. Make it through the six-month budget and you may find that your habits are so well-formed that you follow your spending plan without even trying!
With your timeframe set, it’s time to tackle budget basics:
- Take your money for savings out first! Most people budget out their expenses first and find they have nothing left to save. Figure out how much you need to save to meet your financial goals and take that amount out of your budget first.
- List all your expenses on a sheet of paper without the amount – order your expenses from most to least important, without any consideration to how much each costs. Talk about which you might be able to cut or drop altogether if things get tight. This really helps with those little expenses, the things that you probably don’t need but you look at the low monthly cost and think, “well, it’s not that much anyway.” Prioritizing and thinking about your expenses without looking at costs can really put things into perspective.
- Work through your budget – After these first two steps, work through your budget from income to expenses.
If you’ve got extra money at the end of your budget, congratulations! Take some of the money and set it aside to help meet your financial goals but don’t forget to treat yourself as well. Consider saving a little more in the first month or two of your budget just in case you missed a couple of expenses.
The bigger problem is what to do if you don’t have enough money to cover your budget. That’s where your expense prioritizing comes in. If you still can’t meet your budget even after knocking off a few unimportant expenses, it’s time to really think about where the shortfall is coming. Is it a chronic shortfall or just because you’ve got a few extra expenses in particular months?
If your budget shortfall is something that is going to persist, you need to make more money. You can either get a better job or get another one. I covered 8 real ways to make extra money in a recent post, most of which I’ve tried myself.
Depending on how deep your budget shortfall is, you may need to consider some of these side-hustles while you look for a better paying primary job. Whatever you do, resist the temptation to cut back on your savings. Otherwise you will be stuck in the same cycle of living paycheck-to-paycheck for the rest of your life.
Budgeting really doesn’t have to be difficult and most people quickly get to a point where they are meeting their financial goals without even thinking about them. Setting financial goals and then following a simple process on a budget you can keep.
Join us next week for our post on Investing and don’t miss the rest of the five-week series covering retirement planning, taxes and insurance.