Last week, I wrote about the importance of setting real life goals in order to take and maintain control of one’s own financial condition. It’s important to break past the idea that a life goal is based on money. For example, entering retirement with $4,000,000 is a good target, but it’s not a major goal. Your goal is the purpose for earning that $4,000,000. What do you want to do with that money? Is your goal for life to retire comfortably in a location with a low cost of living? Is you goal to provide financially for your family? Or is your goal to have an effect on some issue that you care about?
The life goals define your savings and investing targets. How much money will you need to achieve your goal in the manner you wish to achieve it? This will vary from person to person, even when the goals are shared. Three people might have the same goal, for example, to promote financial education for teenagers. One person may wish to achieve this goal by creating and managing a charitable foundation, another would prefer to become a public school teacher, while a third individual might choose to write a personal finance column. Each path, inspired by the same mission, requires significantly different financial obligations.
Long-term savings and investing targets
Ideally, determine your goals while you’re still young. The earlier you start to work on a goal, the more time you’ll have to meet your financial targets. (Also, if you decide to change your goal while on your path, you’ll have more flexibility to change course.) In reality, there is rarely enough time. With time on your side, you can afford to be more conservative with your investments in order to reach your goal, but the urgency of a short time horizon requires you accept more risk or work harder to raise the money you might need.
While in an earlier article, I warned against using the “SMART” model for defining your life goals. But now that you have your mission out of the way and are focusing on the financial requirements for achieving your goal, it helps to keep your targets in perspective. Your financial targets should be specific, measurable, attainable, relevant, and time-based. For example, if your ultimate mission is to support arts education in your town and your path for achieving this goal involves establishing a scholarship for college-bound students attending your local high school, your SMART target may be to set aside $1,000,000 within five years. The interest earned on that money can then be used by the school to fund each year’s scholarship. This sets a specific, measurable, relevant, time-based target for reaching your goal. If your income level allows you to save $200,000 above your other expense and savings needs each year, or if you currently have investments that might appreciate to this level, this target is attainable.
Short-term savings and investing targets
If you haven’t already achieved a comfortable level for your emergency fund, that should your primary short-term financial targets. This is a key component of a financially stable lifestyle, regardless of your long-term goals. Here are some resources about emergency funds.
- The Right Size for Your Emergency Fund
- What Qualifies as an Emergency?
- 50 Tips to Help Establish Your Emergency Fund
Other short-term financial targets depend on personal needs, outside of your larger mission. You may want to dedicate your life to saving feral cats, but you’d also like to own a house. To purchase a house responsibly, you may need to provide 20% of the purchase price at the time of the sale as a down payment. If your mission is to help search for forms of life in other galaxies, you will need to earn a college degree or two. Enrolling in college requires some financial consideration, and the requirement is much more immediate.
If you’ve determined that you have ten years to raise $1,000,000 to start a foundation, you can set short-term targets to maintain your focus. The targets might not be achievable if evenly spaced, such as earning $100,000 per year. The achievement of a goal such as this might require a slow start and using compounding interest to your advantage. You need to consider the specific financial tasks you need to accomplish in order to start a foundation with $1,000,000 within ten years, such as fundraising among friends and family.
High-yield savings accounts should be part of your short-term targets. This is one of the reasons I still enjoy ING Direct despite the bank’s slightly lower interest rates than those offered by other online banks. It’s easy to split your ING Direct savings account into sub-accounts, each designated for a specific target.
Using short-term and long-term financial targets will help you stay on task as you reach to achieve your missions, but don’t be afraid to change your plans. The experiences you encounter while on your path might point you to an idea you hadn’t considered originally, reshaping your mission or changing it entirely. If that happens, you may need to revise your expectations and targets. The mission sets a guideline for living your life, but it’s this living that is the important part, not reaching a specific goal.
Here is what we’ve explored on Consumerism Commentary in terms of taking control of your finances so far:
- Part 1-A: Become Aware
- Part 1-B: Take an Inventory
- Part 1-C: Make Accurate Predictions
- Part 1-D: Decide to Take Action
- Part 2: Track Your Money
- Part 3: Spend Less Than You Earn
- Part 4: Use High-Yield Savings Accounts
- Part 5: Build a Better Budget
- Part 6: Get Out of Debt
- Part 7: Set Goals
Updated June 16, 2011 and originally published December 15, 2008.