Jan 31

Jan 31 How to Budget Step 3 - Setting Goals

Setting one to three realistic financial goals is critical to financial success. In Steps 1 and 2 of this series, I talked about creating systems for tracking and recording your expenses. This week, I’ll finally focus on the first step I take in budgeting (as described in my very first post), setting goals.

This Week’s Budgeting To Do List

Before getting to the discussion of setting goals, here are your budgeting tasks for this week:

Continue using and refining your expense tracking system.
Continue to enter your expenses into the spreadsheet.
Set three-to-five-year goals.
Convert the goals to short-term, specific action items.

Set Three-to-Five-Year Goals

My first step in the budgeting process is to identify my financial goals. These goals are statements of what I want to accomplish with stated time frames. Here are some examples of different goals you might have, depending on your age and your current financial situation:

If you have a lot of student loans, credit card debt, car loans and/or other loans: I want to be debt-free, other than my mortgage, in five years.
For people who can’t quite make ends meet: I want to create a budget and spend less than I make.
If you don’t have any credit card debt and can cover their expenses, including any loan payments, I want to be able to::

a. Buy SOMETHING I WANT or take a vacation to SOMEPLACE I WANT TO GO within three years.

b. Buy a $250,000 house with a 10% down payment within two years.

c. Take maternity/paternity leave and support SOME NUMBER of children starting next year.

d. Start saving as much as possible for retirement.

e. Save enough so I can retire at AGE with SOME AMOUNT of money (before inflation) available every year.

f. I want to give 5% of my earnings to charity each year.

Pick no more than three goals, preferably only one or two, to target over the next few years. Make sure they are realistic. For example, if your student loans and credit card debt are a substantial portion of your income, it might be unrealistic to set a goal of paying them off in one year (unless you want to take the FIRE concept to an extreme). Or, if you are 50 and have no retirement savings, a goal of retiring at 55 is likely unrealistic unless you have another source of income.

Turn Goals into Actions

Now that you know where you want to go, you need to identify what you need to do this year that will allow you to achieve your goals. The list below gives some ideas for the sample goals above.

Goal: I want to be debt-free, other than my mortgage, in five years. This year’s action items: Adopt one of the student loan pre-payment strategies in this post. Pay all current charges on my credit card every month and not take out any other loans.
I want to spend less than I make. This year’s action items: Create a budget to see where I can cut expenses. Find an additional source of income that will cover the expenses that exceed my current income.
For people who don’t have any credit card debt and can cover their expenses, including any loan payments:

a. I want to be able to buy SOMETHING I WANT or take a vacation to SOMEPLACE I WANT TO GO within three years. This year’s action items: Set aside designated savings equal to one thirty-sixth of the cost of my purchase every month.

b. I want to be able to buy a $250,000 house with a 10% down payment within two years. This year’s action items: Research the costs of home ownership, including property taxes, maintenance, insurance and mortgage payments. Set aside designated savings equal to $1,041 ($250,000 x 0.10 / 24 months) every month. If the total monthly cost of home ownership is more than the $1,041 a month I am saving for the down payment, make sure there is room in my budget to cover those expenses once I buy the house.

c. I want to be able to take maternity/paternity leave and support SOME NUMBER of children starting next year. This year’s action items: Research the costs of having children, both the medical costs associated with child birth and the costs of supporting them when they are young. Learn about how much, if anything, my employer will provide for salary replacement for maternity/paternity leave. Set aside designated savings equal to one twelfth of the difference between my normal wages and what my employer will pay during my maternity/paternity leave. Make sure I can adjust my budget for next year so it covers the costs of having children.

d. If you are under 40: I want to start saving as much as possible for retirement. This year’s action items: Put retirement savings in my budget. Read Susie Q’s post about various retirement savings vehicles (Roth or Traditional IRAs and 401(k)s in the US or group or individual RRSPs or TFSAs in Canada) to figure out which best suits me. Make contributions as budgeted.

e. If you are over 40: I want to save enough so I can retire at AGE with SOME AMOUNT of money (before inflation) available every year. This year’s action items: Figure out how much money I need to save every year to meet my goals, including reading Susie Q’s post on how much that is. (See the last section of Susie Q’s post on WealthUp and check back for future posts.) Put that amount of retirement savings in my budget. Read Susie Q’s post about various retirement savings vehicles (Roth or Traditional IRAs and 401(k)s in the US or group or individual RRSPs or TFSAs in Canada) to figure out which best suits me. Make contributions as budgeted.

For people who want to give to their community by donating money. This year's action items: Identify charities to whom I want to give and the best ways to contribute to them, using A Dime Saved's Guide to Giving to Charity to help inform my decisions.

One Last Tip

It is good to revisit your financial goals every year or two. In some cases, you won’t have made progress towards them and you’ll want to figure out why and fix the problem or revise the goals. In other cases, you’ll have made significant progress or attained your goals and can set new goals.