Creating and following a spending plan has three stages: before, during, and after. Before establishing your budget, take action to set financial goals. Long-term goals are financial targets or ends that an individual or family wants to achieve perhaps more than five years in the future. Such goals provide direction for overall financial planbudget ning as well as shorter-term budgeting. An example of a long-term goal is to create a $1 million retirement fund by age 60. Goals must be specific. They should contain dollar-amount targets and target dates for achievement. If you have a small income or large debts, it may be unrealistic to think of long-term goals until any current financial difficulties are resolved. You may be unable to do much more than take care of immediate necessities, such as housing expenses, food, and utility bills. In such instances, you need to focus on short-term efforts to improve your financial situation. You may need to focus on paying down debt, not adding to it.
Intermediate-term goals are financial targets that can be achieved between one year and perhaps three to five years. Examples of intermediate-term goals are creating an emergency fund amounting to three months of income within four years, saving $22,500 within three years for a down payment on a home, taking a $4000 vacation to China in two years, paying off $8000 in credit card debt in one and a half years, and paying off a college loan in five years. Short-term goals are financial targets or ends that can be achieved in less than a year, such as finishing college, paying off an auto loan, increasing savings, purchasing assets (i.e., vehicle, furniture, television, stereo, clothes), reducing highinterest debt, taking an annual vacation, attending a wedding, buying life insurance, and making plans for retirement.
You need to be as clear as possible about what your financial goals are. The goals worksheet in Figure 3.5 provides examples of how much to save to reach long-, intermediate-, and short-term goals. People can view such savings as a fixed expenditure (such as withholding from a paycheck to contribute to an employer’s retirement plan or to transfer to a savings account). Other savings may be a variable such as saving what is left over after all expenditures are made.
You need to be as clear as possible about what your financial goals are. The goals worksheet in Figure 3.5 provides examples of how much to save to reach long-, intermediate-, and short-term goals. People can view such savings as a fixed expenditure (such as withholding from a paycheck to contribute to an employer’s retirement plan or to transfer to a savings account). Other savings may be a variable such as saving what is left over after all expenditures are made.
Prioritizing your goals makes sense. But what are your most important goals? One certain priority should be to pay off high-interest credit cards as soon as possible. Another is to contribute as much as you can afford to a retirement plan. Many college graduates buy a new car soon after getting their first job to celebrate having “made it.” Before you’re lured into following suit, give careful consideration to your priorities and remember that every action carries not only the dollar cost of the action taken but also the opportunity cost of the alternatives forgone. To achieve your long-term goals, you may have to sacrifice by deferring some of your short-term desires.
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