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Achieving your short- and long-term financial goals comes down to having a clear vision of what you want, and the willingness to make a plan and stick to it. A 2015 study from Dominican University of California showed just how powerful our intentions can be. Of folks in the study who put their goals in writing, established action items and sent weekly progress reports to a friend, 76% either achieved their goals or got at least halfway to the finish line.
Findings like these highlight the importance of putting action behind your aspirations. Here are practical tips on how to set and achieve financial goals.
Examples of Financial Goals
Your financial goals are unique to you, but here are some common ones you may be working on.
Create a Budget
A budget is a financial plan that's designed to help you live within your means, prevent overspending and encourage responsible financial habits. Creating a budget that works for you begins with understanding two key details: your income and expenses. The idea is to clarify how much money is coming in and going out on a monthly basis.
Check your recent bank account and credit card statements to review where your money goes, including your discretionary spending, fixed expenses and savings. Pick a budgeting method that feels like a good fit for your lifestyle and that you can see yourself sticking to. The 50/30/20 budget or zero-based budget are two popular approaches that can help you free up money to meet your other financial goals.
Build an Emergency Fund
An emergency fund is just that—a reserve of cash that's there for you when the unexpected happens. From home repairs to surprise medical bills, financial emergencies can come in all shapes and sizes. Having a solid emergency fund provides peace of mind that these expenses won't totally derail your budget. A robust emergency savings account can be the safety net that saves you from having to take on debt.
Experts recommend socking away three to six months' worth of expenses in your emergency fund. This in itself can feel like a big goal, but something is better than nothing. Making room in your budget for monthly contributions to your savings account can add up quickly. Come up with a realistic target number each month, then set up automatic transfers to make it a habit. If you wind up tapping your emergency fund, be sure to replenish it as soon as you can.
Buy a House
Many Americans are ready to go the extra mile to achieve their goal of homeownership. According to a 2019 Wells Fargo survey, 72% were willing to cut their expenses to save for a down payment. Almost half were open to taking a second job. If buying a home is on your bucket list, it's helpful to understand what to expect from the process. Working with a lender to get preapproved for a mortgage can clarify how much house you can afford. It can also help you ballpark your monthly mortgage payment and estimate how big of a down payment you need to save up.
Whether homeownership is near or far, it's wise to monitor your credit. You can check your credit report from all three credit bureaus for free through AnnualCreditReport.com, and it's wise to do this several months before approaching mortgage lenders. Be on the lookout for past-due accounts, high account balances and accounts you don't recognize, which can all hurt your credit score. It's key that you also check your credit score, which you can do for free through Experian. Improving your credit can put you in the best position to get approved for a mortgage with a low interest rate. Continue paying your bills on time, and avoid making large transactions or applying for new credit during this time.
Save for Retirement
Saving for retirement can feel like a tall order—especially if you haven't started yet. In fact, 56% of Americans don't know how much money they'll need to retire comfortably, according to a 2019 Northwestern Mutual study. If you feel behind here, know that the best time to start saving is now.
Look first to your job to see if it offers an employer-sponsored retirement plan. Contributing to a 401(k) directly from your paycheck can help you build your nest egg while reducing your taxable income today. What's more, your employer may match a portion of your contributions. Opening an IRA is another effective way to save when a 401(k) isn't an option. If you don't have enough disposable income to contribute to your retirement, revisit your budget to see if you can cut your expenses and free up some cash.
Pay Off Student Loans
The average student loan balance came in at $38,792 in 2020, according to an Experian analysis. If your goal is to pay off your debt faster, begin by assessing your student loans: List out all your balances, interest rates and monthly payments. Paying more on accounts with the highest interest rates could save you the most money in the long run, but it might be more encouraging if you knock out those smaller loans first.
You might also consider refinancing your student loans. This involves taking out a new loan with a lower interest rate and using it to pay off your student loan balances. Accelerating your payments can help you pay off your debt faster and save you the most money over the long haul.
How to Set Financial Goals That Stick
Laying out financial goals is only helpful if you're ready to work to achieve them. Here are ways to help set and follow through with your goals.
1. Consider What Matters to You
It's certainly possible to work toward more than one financial goal at the same time, like contributing to your 401(k) while also paying down debt. However, spreading yourself too thin across multiple goals could slow down your progress. If you find yourself with competing goals, think about what matters to you most. For some, being debt-free translates to financial freedom. Others may prioritize buying a house or maxing out their 401(k).
To avoid diluting your efforts, consider which financial goals would bring you the most joy—then increase your savings rate accordingly until you cross the finish line. You can then get laser-focused on your next goal.
2. Determine Short- and Long-term Goals
Your financial vision will likely be a mix of short- and long-term goals. Short-term goals include anything you'd like to accomplish in the near future, such as building up your vacation fund or saving for a down payment on a home. Longer-term goals can take the form of retirement planning or setting money aside for your kids' college education.
For goals that have a longer timeline, investment accounts can be a great way to grow your wealth over time. Since you won't need the money in the near future, you're in a better position to weather market ups and downs along the way. Meanwhile, a high-yield savings account, certificate of deposit or money market account are usually your best options for parking money you plan on using sooner rather than later.
3. Track Your Progress
Reaching a big financial goal probably won't happen overnight. To increase your odds of success, consider breaking larger goals into smaller, shorter-term objectives. Let's say you want to build your emergency fund up to $20,000. The first step is setting a realistic timeline. If you settle on a goal of having that much saved in three years, you'd need to save roughly $6,667 annually. You can break that down even further to $556 per month—or $278 per paycheck if you get paid twice monthly.
This number may suddenly feel more attainable. What's more, you're creating a simple way to monitor your progress. Establishing a savings target and timeline for each financial goal can make it easier to keep track of how you're doing.
4. Hold Yourself Accountable
Your plan won't do you any good if you don't follow through. While tracking your progress, you may find months where you fall short of your target. Look at these hiccups as opportunities to understand why you're struggling. Is your short-term goal too ambitious? You may find that overspending in other areas of your budget is impacting your ability to keep up with your savings target. Holding yourself accountable will require you to pinpoint your challenges, and plan ahead to reduce the likelihood that they'll happen again.
5. Course-Correct as Needed
Life has a way of disrupting even the best-laid plans. While working toward your financial goals, you may need to make adjustments along the way. An unexpected job loss or dip in income, for example, might result in a temporary setback. The most important thing is to contribute whatever you can to your goals until you're back on solid ground. On the other end of the spectrum, coming upon a cash windfall or salary increase could enable you to accelerate your savings rate and reach your goals faster. Either way, your financial goals may change as you move through different phases of your life. This isn't a problem as long as they're aligned with your values and long-term vision.
Keep Tabs on Your Credit Throughout the Process
Keeping track of your credit is crucial to your financial health. Create an Experian account to unlock access to your FICO® Score☉ and Experian credit report at no charge. Having this information on hand can help you strengthen your credit and set the stage for financial success.