If you’re like many people, you’ll be thrilled to have 2020 in the rear-view mirror. The emotional, physical, and financial challenges of life during a pandemic have taken a toll on all of us in varying degrees.
As this challenging year comes to a close, it’s more important than ever to create smart personal finance goals. Times of uncertainty or crisis can be an opportunity to reevaluate your priorities and get a fresh financial start. This post will help you set better money goals that are easier to keep and crush in 2021.
5 Tips to Set Better Money Goals
Creating money goals can feel overwhelming because there’s probably a lot you want to accomplish. Setting priorities and improving your financial life comes down to these fundamental steps:
- Understanding your current financial situation
- Knowing what you what your financial situation to be
- Bridging the gap between the two
You need a big-picture view of where you are today to create a realistic and overarching financial plan.
So, the first step is to get organized and assess the state of your financial life. You need a big-picture view of where you are today to create a realistic and overarching financial plan.
Then, you must be clear about what you want to do or create with your money. It’s essential to dream, consider your values, and decide what goals would make you and your family happy.
The last part, bridging the gap between where you are and where you want to be, is the process of determining how to manage your money so you achieve your goals.
Use these five tips to get a holistic view of your finances, set goals, and accomplish them on time.
1. Create or update your Personal Financial Statement
If you’re a regular Money Girl reader or podcast listener, you know that I recommend using a Personal Financial Statement (PFS) as the cornerstone of your financial plan. It’s a critical tool for getting organized and gauging your financial health.
You can calculate it on paper, in a software program, or with a spreadsheet. Figuring your net worth isn’t difficult; it just takes a little time to gather and accurately record all your information.
When you subtract your total liabilities from your total assets, you’ve figured your net worth and have a baseline to measure your future progress.
Every time you update your PFS, you calculate your net worth. The definition of net worth is a straightforward formula: Net worth equals assets minus liabilities.
Your assets are items of value that you own, and your liabilities are the debts you owe. When you subtract your total liabilities from your total assets, you’ve figured your net worth and have a baseline to measure your future progress.
If your net worth is negative or slides down during tough financial times, don’t panic. What happens over several years is more important than a temporary setback.
If your net worth is negative or slides down during tough financial times, don’t panic.
To give yourself a financial checkup, recalculate your net worth every year. Evaluate ways to increase it by boosting your assets, such as savings and investments, and reducing your debts, such as credit cards and loans.
2. Envision the future you
When you’re setting goals, a useful exercise is to imagine your life five years from now. Consider where you’re living and how you spend your time. In five years, what would you be proud to say you accomplished?
Stretch your imagination further and do the same for your life in 10 or 20 years. Then imagine you’re at the end of your life. What accomplishments would make you feel good about yourself even in your final hours?
Consider what needs to change so that you have more security and less stress next year.
Another approach is to consider what about your financial life has been disappointing or worried you the most. Consider what needs to change so that you have more security and less stress next year.
These questions can give you essential information about yourself and inspire you to plan and set goals that truly matter to you and your family.
3. Know where your money is going
After analyzing the big picture of your finances and considering what you want to accomplish, it’s time to zoom into the details. You can’t change or improve what you don’t measure, which is why having a spending plan or budget is critical.
If you’ve never created a budget, try Mint, a free app that links up with your financial accounts so you can categorize transactions and set a budget. Quicken is a more robust financial program that allows you to budget, create reports, track investments, pay bills, and do many advanced functions.
The 50/30/20 spending plan
If you don’t enjoy monitoring your cash flow by specific categories, another technique is known as the 50/30/20 spending plan. With this approach, you lump various expenses into one of three categories: fixed expenses, variable expenses, and savings.
You’d spend 50% of your take-home pay on fixed expenses, such as housing, food, transportation, insurance, and debt payments. These are your necessities and everyday living expenses.
You might spend 30% on variable expenses, such as dining out, entertainment, and clothes. These are nice to have but not essential.
The remaining 20% would go toward savings.
If this simple technique helps you get started with a spending plan and watch your cash flow more closely, it’s a win. Then you can refine your spending plan later if you decide that you want to measure specifics, such as how much you spend on alcohol, books, or shoes.
4. Build goals into your spending plan
Once you see how money is moving in and out of your hands, you’ll know what has to change for you to meet your goals. For example, if one of your goals is to max out a Roth IRA in 2021, you can break it down into 12 monthly contributions of $500 for a total of $6,000.
If you don’t shape your spending plan to account for your living expenses and financial goals, they aren’t likely to happen.
Adding goals into your spending plan will likely force you to cut spending in categories such as entertainment or dining out. Or you may realize that you need to earn more by asking for a raise, getting a better paying job, or starting a side gig.
If you don’t shape your spending plan to account for your living expenses and financial goals, they aren’t likely to happen. If you have a spouse or partner who shares your financial life or goals, I recommend working on your spending plan together.
5. Automate your money goals
Once you create financial goals, it’s essential to protect them with automation. Here are some ways to put your money goals on autopilot:
- Participate in a retirement plan at work (such as a 401(k)) that deducts elected contributions from your paycheck before you receive it.
- Set up recurring transfers from your bank account to a traditional or Roth IRA.
- Open a 529 college saving plan for future college expenses for yourself or a family member.
- Have a portion of your paycheck, benefits, or tax refund sent directly to a bank savings account. That’s a great way to build an emergency fund, save for a vacation or holiday gifts.
No matter if you want to be a homeowner, pay for college for your children, or build a larger emergency fund, identifying what you’re working for boosts your motivation. Having a realistic plan to turn your dreams into realities will go a long way toward making you feel more secure no matter what’s happening in the world.