Types of financial goals

Financial goals cover a wide range of financial aspirations: controlling living expenses, meeting retirement needs, setting up a savings and investment program, and minimizing your taxes. Other important financial goals include having enough money to live as well as possible now, being financially independent, sending children to college, and providing for retirement. Financial goals should be defined as specifically as possible. Saying that you want to save money next year is not a specific goal. How much do you want to save, and for what purpose? A goal such as “save 10% of my take-home pay each month to start an investment program” states clearly what you want to do and why.

Because they are the basis of your financial plans, your goals should be realistic and attainable. If you set your savings goals too high for example, 25% of your take-home pay when your basic living expenses already account for 85% of it then your goal is unattainable and there’s no way to meet it. But if savings goals are set too low, you may not accumulate enough for a meaningful investment program. If your goals are unrealistic, they’ll put the basic integrity of your financial plan at risk and be a source of ongoing financial frustration. You must also use realistic assumptions when setting goals. Exhibit 1.5 will help you do a reality check. It’s important to involve your immediate family in the goal-setting process. When family members “buy into” the goals, it eliminates the potential for future conflicts  and improves the family’s chances for financial success. After defining and approving your goals, you can prepare appropriate cash budgets. Finally, you should assign priorities and a time frame to financial goals. Are they short-term goals for the next year,

or are they intermediate or long-term goals that will not be achieved for many more years? For example, saving for a vacation might be a medium-priority short-term goal, whereas buying a larger home may be a high-priority intermediate goal and purchasing a vacation home a low-priority long-term goal. Normally, long-term financial goals are set first, followed by a series of corresponding short-term and intermediate goals. Your goals will continue to change with your life situation, as Exhibit 1.6 demonstrates.


Putting Target Dates on Financial Goals
Financial goals are most effective when they are set with goal dates. Goal dates are target points in the future when you expect to have achieved or completed certain financial objectives. They may serve as progress checkpoints toward some longerterm financial goals and/or as deadlines for others. One goal may be to purchase a boat in 2015 (the goal date), another to accumulate a net worth of $200,000 by 2026. In the latter case, goal dates of 2016 and 2021 could be set for attaining a net worth of $10,000 and $110,000, respectively.

Long-Term Goals
Long-term financial goals should indicate wants and desires for a period covering about 6 years out to the next 30 or 40 years. Although it’s difficult to pinpoint exactly what you will want 30 years from now, it’s useful to establish some tentative long-term financial goals. However, you should recognize that long-term goals will

change over time and that you’ll need to revise them accordingly. If the goals seem too ambitious, you’ll want to make them more realistic. If they’re too conservative, you’ll want to adjust them to a level that encourages you to make financially responsible decisions rather than squander surplus funds.

Short-Term Goals and Intermediate Goals
Short-term financial goals are set each year and cover a 12-month period. They include making substantial, regular contributions to savings or investments in order to accumulate your desired net worth. Intermediate goals bridge the gap between short- and long-term goals, and both intermediate and short-term goals should be consistent with those long-term goals. Short-term goals become the key input for the cash budget, a tool used to plan for short-term income and expenses. To define your short-term goals, consider your immediate goals, expected income for the year, and long-term goals. Short-term planning should also include establishing an emergency fund with 3 to 6 months’ worth of income. This special savings accountserves as a safety reserve in case of financial emergencies such as a temporary loss of income.

Unless you attain your short-term goals, you probably won’t achieve your intermediate or long-term goals. It’s tempting to let the desire to spend now take priority over the need to save for the future. But by making some short-term sacrifices now, you’re more likely to have a comfortable future. If you don’t realize this for another 10 or 20 years then you may discover that it’s too late to reach some of your mostimportant financial goals.Worksheet 1.1 is a convenient way to summarize your personal financial goals. It groups them by time frame (short-term, intermediate, or long-term) and lists a priority for each goal (high, medium, or low), a target date to reach the goal, and an estimated cost.

We have filled out the form showing the goals that Bob and Cathy Case set in December 2010. The Cases were married in 2007, own a condominium in a Midwestern suburb, and have no children. Because Bob and Cathy are 28 and 26 years old, respectively, they have set their longest-term financial goal 33 years from now, when they want to retire. Bob has just completed his fifth year as a marketing representative for a large auto products manufacturer. Cathy, a former elementary school teacher, finished her MBA in May 2009 and began working at a local advertising agency. Bob and Cathy love to travel and ski. They plan to start a family in a few years, but for now they want to develop some degree of financial stability and independence. Their goals include purchasing assets (clothes, stereo, furniture, and car), reducing debt, reviewing insurance, increasing savings, and planning for retirement.

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