5 simple steps to setting financial goals
Thursday, 7 May 2015
It's a common myth that financial planning is only for people in a certain age group or income bracket.
But financial planning is helpful for people at all stages of their lives. After all, everyone has financial dreams and needs. Financial planning will help you identify your goals and create a strategy for achieving them. But just how exactly do you set financial goals? And how far in the future can you realistically plan them?
Jon Woodford, Senior Vice President of Wealth Financial Planning at BBVA, has been in the financial planning and wealth management industry for more than two decades. A Chartered Financial Consultant and Certified Retirement Counselor, he compares financial planning to taking a long trip. "You don't just hop in the car and start driving. You need a map," he says. "Financial planning gives you that road map for where you want to go."
Here are five steps to setting financial goals so that you reach your destination.
Step 1: Figure out what matters to you
Before creating a financial plan, you need to understand your goals. Of course, most of us want to save for retirement. And if you have children, you're likely thinking about a college savings plan. But do you want to buy a home within the next five years? Are you planning to buy a car at the end of this year?
It's important to think about your short-term goals, as well as those long-term, big-ticket items. Perhaps you want to finance a trip to Thailand, or take your parents out for an expensive dinner for their anniversary.
"Write your goals down on a piece of paper and get them in front of your advisor," Woodford suggests. The more specific you can be, the better. That ensures your plan reflects all of your goals.
While recording your goals, make sure they are SMART goals: Specific, Measurable, Achievable, Relevant, and Timely. A goal to save for that trip to Thailand can be made SMARTer with a detail-oriented eye. For instance, you could write: "Save $2,000 total for the Thailand trip by putting $115 monthly into my travel savings account over the next 18 months."
Step 2: Prioritize
Goals needs to be prioritized and quantified. After you've pulled together all of your financial information and you've made a list of goals based on that data, you're ready to prioritize.
If you want to pay off credit card debt, establish an emergency fund, save for retirement, buy a new house, and also create an annual travel budget, all of that may not be possible right away. Thus, the need for prioritization.
Take your list of goals and number them based on your true interests, as earlier defined. Many financial advisors would advise their clients to start with three key measures of basic financial health: Retirement funding, emergency fund savings, and debt repayment. You don't have to approach these one at a time, but you can choose to work on goals simultaneously and "stack" goals by creating a progression of one goal to another. For instance, once you pay off your highest interest debt, you can start saving for a new car. Stacking can help motivate you through the more tedious goals so you can get to the exciting ones!
In some cases, you might need to start small. For instance, Woodford says when he and his wife set up their first IRA account in their early 20s, they could only afford to contribute a $100 a year. That sum may appear modest, but the point is to get in early, and stay on your course.
Step 3: Create a realistic budget
In order to achieve your goals, you need a budget, one that takes all of your expenses into account. Woodford says that people tend to know their monthly expenses and overlook the rest. "But car insurance, taxes, property taxes—these are paid quarterly or once or twice per year and should be budgeted for accordingly."
Financial planning startup LearnVest is known for its 50/20/30 Rule for budgeting, which specifies that no more than 50 percent of your income should go to essential living expenses (like housing, utilities, transportation, and groceries), no less than 20 percent should go to your financial priorities (such as retirement planning and an emergency fund), and no more than 30 percent should go toward your lifestyle (things like shopping, clothing, entertainment, fitness, and all the other frills in life).
Your budget should start with comprehensive look at your income and determine the best way to utilize that income on a monthly or weekly basis. Utilize LearnVest's 50/20/30 Rule, come up with your own framework, or plan a budget with an advisor.
Step 4. Automate
After you've figured out your expenses, then you can figure out how much income you have left to put aside into savings and retirement. But Woodford strongly recommends that you take that percentage—no matter what it is—and have it automatically deducted into a separate account.
"The one thing I've found over the past 23 years is that nobody has leftover money at the end of the year," he says. "So take a certain percentage out of it right up front and pay yourself first. Get it into that savings account, get it into that qualified plan, and maximize those retirement savings."
In fact, you're best served by automating as much of your budget as possible so you're not relying on willpower or your memory to stay on track. Most banks and service providers have automated payment systems that you can use to completely automate your financial life. Setting up weekly or monthly payments will not only take off the mental burden and keep you on track, but will also help smooth out your cash flow. If you've ever forgotten a payment, you know that $100 missed payment this month means a $200 payment (plus a late fee) next month.
And if you get a raise? Sock that money away, too, Woodford says. "Save today, so that you can live like nobody else tomorrow."
Step 5: Check on your progress
Once you've made a plan, make sure you check in regularly so that you stay on track. Whether you've got an advisor or you're managing your plan on your own, you need to make sure you're staying the course, and be aware of under-utilizing your funds.
Financial planning is iterative, says Woodford. It's not a one-and-done solution, but rather a base plan that should be reviewed and updated periodically. Woodford suggests that financial plans be revisited annually with a financial advisor, or anytime you've had a big life event. "Anytime you'd send a Hallmark card—such as a wedding, graduation, or big move—that's a good time to call your advisor," he says.
If you're not working with an advisor, schedule annual review sessions for yourself. This is an opportunity to sit down, take another look at your goals and your budget, and adjust accordingly. You should be looking at changes in your income and expenses, as well as your progress on your financial goals over the past year. Did your salary change? Did your mortgage, utilities, or other expenses increase or decrease? Did you meet your financial goals for last year? If not, what happened?
Every time you hit one of those Hallmark card moments in life, you should go over your financial goals again. Going to college, receiving a promotion, getting married, or moving to a new city are all examples of life events that affect finances. If you're not reassessing your financial plan, something will likely be off.
Woodford stresses that financial planning isn't just for the soon-to-retire, but for everyone. "Everyone needs a plan, and the sooner you start, the better," he advises. So get out there, get your plan together, and don't forget to keep it up to date!
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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