Happy New Year! And welcome once again to resolution season. Most of the time, it seems New Year’s resolutions focus on health or money. (And, of course, most people give up on them by Groundhog Day.)
Your odds of success go up dramatically if you create a plan. One survey found that 56% of people with a plan reported making good or excellent progress towards their savings needs, compared to only 24% of those with no plan.1 In case money is on your New Year’s resolution list, here are six steps you can follow to set achievable financial goals.
Step 1: Give Your Goal a “Why”
When it comes to numbers, it can be hard to evoke an emotional response. That’s why it’s essential to articulate the purpose you’re trying to achieve--putting a reason behind the numbers can be a big motivator. You could say, “I want to pay my student loans off faster.” But imagine the difference if you were to say, “I want to pay off my student loans faster so we can buy a house and start our family.” Remembering why you’re, say, keeping your phone for one more year can help make your decision a little easier.
Step 2: Make Your Goals Measurable
Be specific when describing what you want to achieve; your goals should have a measurable and clear finish line. This will help you track your progress and make it easy to know when you’ve succeeded. For example, if you want to save money for a down payment on a new car, choose a number and a date. Instead of saying, “I want to save some money and buy a new car next year,” try, “I will put $300 in a separate savings account each month until I have the $2,400 I need for a down payment for a new car by August 31, 2021.” (Bonus tip: your monthly savings goal for the down payment should be at least as much as you expect to pay each month on the loan for the car.) This is a clear, well-defined goal you can track month by month.
Step 3: Be Reasonable
A goal that’s genuinely out of reach will only be frustrating. But you may be surprised at what you really can achieve. To figure out what’s possible, create a plan. If your current saving and spending habits support your goal, then you’re likely on the right track. But if your goal is to increase your savings by $10,000 over the next year, and you’re only saving $500 per month, then you need to adjust your target amount, your timeline, or your monthly savings.
Step 4: Set a Spending and Savings Plan
If your spending habits don’t support your goals, you’ll find it hard to make as much progress as you’d like. To increase your wealth, make your savings automatic, such as with a 401(k); but then do everything you can to make every spending decision as conscious and intentional as possible. For many people, merely noting how much they spend and where their money goes each month creates a practice of mindful spending, making it easier for them to cut expenses. This provides one of the most pain-free ways to give yourself more money to save.
If that does not work for you, you may want to create a monthly budget that supports your future financial goals and current needs. One popular budget breakdown is 50/30/20:
- 50% on needs (e.g., food, clothing, shelter, health care, what you need to keep your job)
- 30% on wants (e.g., streaming services, dining out)
- 20% on savings and debt repayment
This allocation isn’t perfect for everyone: for example, if you value early retirement, you may want to increase the percentage you devote to savings. But it’s better to get started using this ratio instead of perfecting a plan that takes months longer before you begin.
Step 5: Balance Short-Term Needs and Long-Term Goals
Money is a tool. The reason you set financial goals isn’t to accumulate more green pieces of paper; it’s to provide you more ability to experience joy, serenity, contentment, love, and fulfillment. And while your future happiness is vital, it’s equally important to meet your current needs. Don’t pass up every trip, every renovation, or every celebration now because you’re saving for a retirement that’s years away. Yes, your retirement savings are essential, but keep a balance. Drastic cuts in spending are just as unsustainable as spending all your wealth before you retire.
Step 6: Higher Income Doesn’t Equal Success
We’ve all heard of celebrities declaring bankruptcy despite being highly paid. It’s natural to think that a higher income means more wealth. Still, it doesn’t matter how much income you have if you’re not saving enough. (We frequently see high earners undersaving and overspending because maxing out their retirement accounts is insufficient to achieve their retirement goals.) Your wealth and the success of your financial goals are dependent on what you do with the income you have. As you set financial goals, remember that your savings targets almost always need to change with your income.
If you have a financial milestone you’d like to start preparing for, begin with a plan. Evaluate your current needs and spending habits to select a realistic goal and develop a plan of action based on your unique financial picture. Best of luck with any resolutions you make—financial or otherwise—and Happy New Year!.