Financial literacy is the ability to understand and use various financial skills like saving, budgeting, and investing. These skills are necessary when trying to achieve financial independence and financial well-being.
“If you fail to plan, you are planning to fail.”
The above quote from Benjamin Franklin applies to many things in life, but when applied to our finances, our failure to plan can be costly in the long run. Although we can never be fully prepared for things like a pandemic, we did, however, learn that planning ahead can help us weather the storm.
When we find ourselves in a financial shock, like most people experienced during the pandemic, and some experience every month, planning ahead buys us time and prevents us from making decisions in moments of emotional upheaval. You’ve probably heard the phrase “do not make important decisions in times of desperation.” It’s important to always remember that.
Setting financial goals can help you clarify and plan for your goals, whatever they are. If you’re unsure of how to set measurable goals, the simple steps below can help you get started.
How to Set Financial Goals
1. Define Your Goals
Before you begin, it is important to define what your goals are and write them down. Meaning, is it a short-term (0-3yrs) or a long-term goal (3-5yrs)? Does this goal require resources from others, or is this an individual goal? The answers to these questions will help you clarify exactly what the goal is and how to achieve it.
2. Create a Plan
Next, use the SMART goal to create a plan.
S = Specific
Be very specific and clear about your goal here. What do you want to achieve? Why do you want to achieve it? What will it take to achieve it?
M = Measurable
You’ll want to quantify your goal to ensure that you know what you’re aiming for. This is where you answer the “How.” If your goal is to pay off a credit card faster, determine how much you owe, your monthly payments, and how much extra you can put toward it for a faster payoff. You may also want to commit to not putting any extra charges on the card.
A = Achievable
Is this goal achievable for you and your current financial situation? Set actionable steps that will help you achieve your goals. If you’re working towards an emergency fund or trying to pay off a car or credit card, determine how much extra you’ll need to set aside each month and how you plan to do it. Remember that small but consistent steps will lead to success.
R = Realistic
Create goals that are realistic for you. The easiest way to feel defeated is to set your expectations too high and beyond your means. Remember that even small but consistent steps can yield the results you want at the end.
T = Time Horizon
Put a time frame on your goal. When will you meet your goals? Will it take 3, 6 or twenty months to achieve your goal?
I want to build an emergency fund for three months’ worth of expenses within the next year. To achieve this, I will cut back on spending by eliminating cable and opting for Sling or Roku. I will also cut back on eating out and instead fix my own lunch and grab coffee from home. By achieving this goal, I’ll be able to save (blank) and be better prepared to absorb unexpected financial shocks that are almost always inevitable.
Setting a goal is a great way to add purpose to every action you take. As you create your plan, be sure to place your written plan somewhere you can see it, and be sure to check your progress as you go along, this can give you the momentum you need to keep going. Additionally, having a written plan outlined can help you think twice about making any other big purchases that aren’t fully planned out.