If you've decided that it's time to work on setting goals that will help you achieve more financial balance and financial security, you deserve a hearty pat on the back. It's time to take more control of your finances and start dictating more of your future, but before you're off to the races, take the time to understand what constitutes a reasonable goal that will yield the results you want. Here are five mistakes you should avoid when setting financial goals.
1. Setting goals based only on your current lifestyle.
When most people sit down to think about and record their financial goals, they are usually only concerned with improving their immediate circumstances. They want to be able to pay down debt as fast as possible and put more money into savings each month. However, even though this is a good start, it is important to think long term when setting financial goals. Are you saving for retirement? Do you want to have kids, and are you putting money away to support their future? These questions will help create a long term goal for future lifestyle accommodations.
During the course of your life, you will go through many different changes and your financial goals will need to adapt as well. As you consider the bigger picture, be sure to take into consideration the major life events that could affect your goals and the way you will spend and save.
Once you make the decision to reinvent your financial lifestyle and to implement a whole new approach to spending, it can be tempting to set a lot of really big, lofty goals, but that isn't necessarily the best plan. Instead, set smaller goals that you can achieve in a shorter amount of time, so you will feel accomplished while also remaining flexible in case something comes up and you need to adjust your goals. Be patient with yourself and the process and you will experience the results you want.
3. Forgetting about annual expenses.
Once you are ready to sit down to figure out a monthly budget, you'll need a list of all your expenses along with your income to get started. Most people make mortgage, utility, car and other monthly payments that need be factored into the monthly budget. But, what people tend to forget are annual expenses that can sneak up on you and derail your progress. Remember to include annual school expenses, taxes and other bills that can eat up chunks of your income. You may also want to set aside money for common expenses, such as doctor's visits and vehicle maintenance and repair so you can avoid as many surprises as possible.
As you work towards larger goals, it's important to recognize that there are other economic factors at work that may mean things like your retirement account may not end up stretching as far as you anticipated.
Inflation is the rate that the average cost of goods increases over time, and it goes up every year. That means that what you can buy with a dollar today will be less in the future. Prices will keep going up but the value of a dollar stays the same. It’s the reason why you’ve probably heard your parents or grandparents say that back in their day a loaf of bread only cost 25 cents, and prices today are too high.
Be sure to take the potential erosive power of inflation into consideration and adjust your efforts accordingly. You may need to save more than you actually think.
5. Not making distinctions between wants and needs.
Setting goals involves more than just balancing out numbers. You also need to be clear about your priorities and decide which goals will have the greatest impact on your life. While you might want to save for a trip overseas, it is more important that you have a health insurance plan and emergency fund.
In summary, setting goals is an essential step toward achieving financial security and having the funds to live the life you want, but be sure to avoid the common pitfalls mentioned above during this process. Make sure to have a big-picture view of your future while also taking into account long-term expenses, emergencies, and other financial responsibilities that may come up.