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How do I Set Financial Goals?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 April 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Setting financial goals is a basic tool in any type of financial planning. Goals of this type provide individuals and businesses with destinations that make it possible to develop specific strategies for achieving these ends, generally to the benefit of all concerned. The actual process of setting financial goals requires evaluating such key factors as income, reserves, insurance, and investments, and how these can be used to develop goals that are timely and realistic.

Evaluating income levels is important when it comes to setting financial goals of any type. The idea is to not only identify the current level of income that will serve as a starting point, but also have some idea of what will happen with that income growth over the years. By projecting income realistically, it is possible to have a better idea of how much money will be available and what type of goals or aims will be doable within a certain period of time. For example, if a short-term financial goal is to establish a savings account with a specified amount in the account at the end of two years, properly evaluating income flow will make it easier to determine how much must be deposited into the account monthly in order to reach that goal.

Setting long-term financial goals often means considering ways to create financial reserves that will aid in achieving those goals within a desirable time frame. Many people set goals that have to do with providing for a spouse and children in the event of an early death of the family breadwinner or an illness that hampers the revenue generation process for an extended period of time. Building financial reserves helps to not only allow the household to keep working toward long-term goals, but also helps to meet immediate needs. For this reason, setting financial goals must include consideration of establishing savings accounts, taking out insurance coverage of different types and even establishing investments that generate dividends or returns that can be called upon in an emergency.

Financial goals must be realistic in relation to the resources at hand and the expectations of more resources to come. This means that even if all the tools are not in hand today, there must be a reasonable expectation that the individual has the ability to acquire those tools at some point. Often, this is managed by setting short-term personal financial goals that pave the way for a larger goal.

For example, an individual who wants to buy a home may need to retire current debts and build up a more attractive credit rating before he or she can qualify for mortgage with an equitable interest rate. The short-term goal would be to pay off unsecured debt within a certain time frame, leaving the individual with a low debt to income ratio and a credit report that reflects a number of debts retired on time. During the same period, the individual may also have the short-term goal of setting aside a certain amount of money in an interest bearing account, effectively creating a resource for a down payment on the home that helps to minimize the total amount of the mortgage.

This combination of short-term and long-term financial goals often works hand-in-hand to allow individuals, businesses, and other entities to continually move forward, achieving each goal in a timely manner. The process also makes it easier to deal with unanticipated issues that would otherwise threaten to undermine long-term goals, since there is time and resources in place for recovery. Short-term goals often pave the way for achieving long-term financial goals, ultimately creating financial circumstances that allow people to enjoy their later years with relatively few worries.

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