So, you’ve finally graduated college and entered “the real world.” Maybe you have secured your first job, or are in a new city, and are feeling truly independent. Now that you have a professional income, you may think that you can spend money on whatever your heart desires. But have you taken a step back from all this newfound excitement to assess the state of your personal finances?
For many young people, the answer is no. To take the next steps towards establishing a secure financial footing for yourself, first understand that personal finances are not to be left to luck. Educating yourself about your financial situation is a pivotal first step in establishing an independent life. Keep finances out of your list of worries by setting goals for yourself. But not just any goals – SMART goals.
Financial goals should be tied to your idea of success
The best way to begin any long-term goal plan is to put thought into what you personally define as success. Where do you want to be in five years? Ten? And how can organizing your finances help you to get there? When you have some answers, you can then begin to formulate achievable but ambitious financial goals. Keep in mind that financial goals should remain flexible, as flexibility creates safety for uncertainty.
What are your personal goals in life? Write them down!
Once you establish your goals, how do you keep them in your focus? Regular reflection can help, but amazingly, studies have shown that regularly writing down goals can increase your likelihood of achieving them by 42%. Take a step back from your daily life, pull out your personal journal, and give regular thought to what you want from your future. What do you want to accomplish for yourself? For your future family? During your retirement?
Next, think in terms of financing these goals. To help, categorize your thoughts into short-, mid-, and long-term goals. Here are some examples:
- Short-term goals: Establish a personal budget, create an emergency fund, pay off credit cards.
- Mid-term goals: Get life insurance, pay off student loans, save for a car down-payment.
- Long-term goals: Estimate retirement needs, save for mortgage down-payment, establish fund for child’s college.
To help prioritize your goals, include timetables for your goals, especially any that apply to specific life stages. You may be far off from having kids (or getting married for that matter), so goals related to starting a family would be long-term, for example. Short-term goals should include things that you hope to be able to finance within the next year or two – paying off credit cards or saving for a vacation are good examples. That said, just because some of your goals are deemed a higher priority doesn’t mean that you have to save extra for them. If you’re able, you should be saving a little bit toward every goal each month.
You have your financial goals, now make them SMART
The SMART framework for goal setting is popular in the business world because it helps to keep your goals from becoming a vague notion of achieving some end. The framework will be very useful for you in your financial goals as well. Here’s what it means to create a SMART goal:
- Specific – State exactly what is to be done with the money involved.
- Measureable – Write the exact dollar amount needed to achieve the goal.
- Attainable – Determine how it can be reached based on your budget.
- Realistic – Do not set a goal that is unattainable or unrealistic.
- Time Bound – Specifically state when the goal needs to be reached.
Here is a SMART example for the goal of paying off credit card debt:
- S: I will pay off all my credit card debt.
- M: I plan to pay off the full $2,400 debt amount until it reaches $0.
- A: Based on my personal budget, I have sufficient discretionary funds to contribute to this goal.
- R: My budget permits me to safely contribute $200/month without interrupting other costs.
- T: By contributing $200/month, I will pay off my credit card debt in 12 months.
The final goal will read something like this: For 12 months, I will to contribute $200 of my monthly paycheck to fully pay off my credit card debt, totaling $2,400.
Try applying this framework to your goals. You may find that some of your goals are unattainable or unrealistic – that’s fine. The SMART process is designed to help you understand what is within your means, and what is pure fantasy.
Provide yourself an opportunity for an annual financial check-up
To stay on top of your finances, set aside (at least) one day of the year – perhaps around New Years – to assess the state of your personal financial goals. As stated above, goals should be flexible. Even if you apply the SMART framework to your goals, life has a way of interrupting even the most noble efforts. A financial goal check-up will help you set better, more realistic goals in the future.
Getting upset with yourself for not sticking to your plan is not productive. Reflect on what happened, reevaluate your approach to financial goals, and create a new, better-informed strategy that will get you closer to achieving your goals. Here are some prompts to consider during your financial check-up:
- How did you do last year? What were you able to achieve?
- Do any of your goals need to be revised? If so, why?
- Evaluate intrinsic versus extrinsic motivations for your goals, both new and existing.
- Do you need a financial advisor to help guide you through your complex financial goals?
Flexibility, patience, imagination – all important attributes when setting a plan for your finances. Knowing your goals, and keeping them SMART, is the first step to a sound financial future. Maintaining the discipline to adhere to your financial goals is not easy at first, but as with anything, you will improve over time if you understand your mistakes. Leaving your goals as a fleeting thought inside your mind is not a good strategy. Practice the strategies outlined above to remain ahead of the uncertainties in life and achieve long-term financial success.