Now that you’ve compared your income and expenses to your values, it’s time to set specific goals that align with your values and vision. And it’s OK if these values and goals change over time. It’s better to start working towards a goal and need to pivot than do nothing at all.
For example, our major financial goal about five years ago centered around saving money for a 20% down payment on a house. After buying our first house, our financial priorities shifted towards financial independence so that we can spend more time with our family. The best definition I’ve read of financial independence comes from Matt Becker of Mom and Dad Money (he’s also a fee-only financial planner). He says financial independence is, “The freedom to make decisions based on what makes you happy instead of what makes you money.”
When you’re financially independent, you can choose to spend more time with your family, traveling, or volunteering. Obviously you can still choose to work, but I’m guessing it’ll be more fulfilling than a standard 9-to-5 job or it may be at reduced hours.
Setting SMART Goals
As you create SMART goals for saving and spending, really think about what you are you working towards. Why is money important to you?
How much do you need to save? And don’t just say “I need to save more.” What is “more?” If you don’t have a specific amount in mind, how will you know when you get there? You probably have a good idea of the price tag based on your vision, say a down payment of $50,000.
Dollars are pretty easy to measure, but what happens when your “vision” dollars start to mingle with your “needs” or “wants” dollars? In order to properly measure your savings, it’s best to create a separate savings and/or investing account. Capital One 360 or Ally Bank are great options for very short-term goals since they’re online and offer a higher interest rate than a brick and mortar bank.
Once your goals move a little further out, even just two to five years, it’s better to invest your money using a platform like Betterment. You can create a conservative portfolio using a higher allocation of bonds than more volatile equity securities to minimize risk and earn a higher return than a standard savings account.
In both cases, it’s best to create automatic transfers into your “vision” savings/investing account. You’ll be less likely to pull from your savings for an impulse purchase. And with automatic transfers, you won’t even miss the money if it’s not available to be spent.
Your monthly savings goal should be reasonable. Set yourself up for success. No need to drive yourself into the poor house trying to save for something enjoyable (i.e. European vacation). To stay motivated, set aside an amount that’s not too far out of reach. Personally, we’ve cut out a few extra frills by dining out less frequently and bringing our lunches to work. But we don’t deprive ourselves and still enjoy a fresh cup of blueberry coffee from Dunkin’ Donuts or a latte from Starbucks.
At the same time, your goal should be a little bit of a reach so that you’re willing to work towards it. That makes accomplishing the goal even more worthwhile. So set the bar high enough for a satisfying achievement!
Set a timeframe and mark the date on your calendar. Again, be specific, not just “in the next 5 years.” And be realistic. Automatic transfers are another way to stay timely. Schedule transfers for once or twice a month so you won’t forget to stash the cash.
An easy way to track your progress is by using Mint.com’s goal tool. It’s as easy as entering your goal, setting a date, and linking a savings or investing account. You then know how much to save each month, which can be factored into your budget. Mint will email your progress every month and offer savings advice, though some of those tips and recommendations are promotional/affiliate links. Betterment has a built-in goal tracking function if you’re saving/investing through them.
You can obviously track everything in an Excel spreadsheet or on a piece of paper, but I like the convenience of having everything online. That way you can access the information on the go and make changes as necessary.
Don’t be afraid to take ownership of your finances! The best way to become financially independent is to learn about the different resources and tools and ask questions!