Setting goals is an important step in financial planning. If you don’t map out specific goals, it can be hard to make significant progress in your financial life. Writing out example goals can give you a framework upon which you can set budgets, set savings schedules, make decisions and more. Without it, you’re flying blind a bit.
It’s important to establish financial goals of different types and of different time frames. For example, a super long-term financial goal might be to retire in 35 years with $5 million in the bank. A super short-term financial goal might be to pay off the remaining $1000 on your credit card by the end of the month. And of course there are annual goals, five year goals, etc.
Before you make your goals, you should have a few concrete pillars of your financial life that are just there. They are kinda goals, but they are more constants than anything. Here are some examples:
- I’m not going to carry any credit card debt ever
- I’m going to max out my 401(k) contributions each year
- I’m not going to have any automobile debt
- I’m going to keep an emergency fund of $10,000 cash no matter what
These constants are important because they exist outside of your goal setting, but provide some overlap or context to your goals. They are more principles that you think should be occurring regardless of what other financial goals you set and achieve.
If you haven’t established these principles for yourself, it can be a good idea to do that first before moving on with setting goals.
Now, let’s take a look at long-term financial goal setting. To me, the super long-term goals involve retirement, and everybody should have those. For anyone whose retirement is at least 20 years out, I think long-term financial goals should be, well, shorter-term. Of course retirement goals are important, and you should have them. But you don’t really need me to help you sort those out.
So, our long-term financial goals are going to be more in the 5-10 year range. I like five year goals a lot. I think they are long enough to give you a solid context for shorter term goals and decisions, but they are short enough to where they are pretty actionable.
Long-term financial goals are going to be specific to each person, so of course, without knowing your financial circumstances, it’s hard to give you exact examples of what your goals should be. But, I think we can work through some examples that can be instructive enough to help you make some personal goals.
Long-term financial goals examples
25-year old with no savings and a decent bit of student debt
For this person, it’s all about getting out of debt and establishing a firm financial footing. So what are your five year goals? Let’s say you have $50,000 in student loan debt, $5,000 in other debt, a $50,000 salary and pretty much no savings. Here’s a look at what I might establish as a five year financial goal:
- No debt – This is a no-brainer. Paying down the debt as fast as possible is the most important move here.
- $25,000 in savings – Getting some sort of savings for an emergency fund and perhaps starting some retirement savings (if you have a 401(k) for example) can be a great move here.
- $100,000 income – At this point in your life, trying to pull together savings from your $50,000 salary is challenging. A primary focus should be to get your income up. Advance in your career. Make more money. Everything opens up as your income grows.
35-year old with a mortgage, a decent income and some savings
For this person, it’s all about moving from a decent financial foundation into wealth mode. I talked to an individual in this situation recently and his goal was to get to $500,000 in investable assets and a paid off home by the time he turned 40. This is an awesome plan. So let’s do it! Here is a five year goal for this person:
- Paid off mortgage – Killing off the mortgage unlocks even more wealth building!
- $500,000 in investable assets – This can include the 401(k) plus other retirement accounts as well as other equities accounts and savings accounts. You can read more about why we think the $500,000 level in investable assets is so huge.
- If you have children, you’ll want to have some 529 accounts going by the time you’re 35. The earlier you start with saving for college, the better.
45-year old with a paid off house, several children and a million in investable assets
For this person, he’s done very well up to this point. For many mid-40’s individuals, they are in prime earning years, they’re building wealth and they might have kids approaching college age. He may even be looking to retire early depending on income streams and how fast his assets grow. Let’s look at a five year financial goal for this person:
- Get college funded and done – You may have 529 accounts that are funded enough. It could be worth it to stop stashing money in there and if there are further needs for your kids during college, you can cash flow them (or pay out of a cash savings account). If the accounts aren’t where they need to be, make it a priority over the next five years to get them fully funded and done.
- Add another $500,000 to non-college savings – With a home paid for and a legitimate income, adding another half million to assets is very doable especially if the stock market performs well.
- Protect your income – If you’re highly paid and don’t work for yourself, do everything you can to ensure you don’t lose your job or income. The only thing stopping you from achieving incredible financial goals at this point is a loss of income.
With these types of five year goals set, you can put together actionable short-term goals at an annual level. You can view these annual, shorter-term goals as steps to hit your five year, longer-term goals.
Short-term financial goals examples
What are some examples of short-term financial goals? These will largely be dictated by your five year goals. For example, if your goal is to pay off your home within the next five years, a good strategy here is to split this into single, year-long chunks. How much do you need to pay off this year in order to be in a position to accomplish this long-term, five year goal?
The great thing about financial goals is that you have the benefit of compounding interest over time. While paying off a mortgage is different, there is a similar dynamic. As you pay down the mortgage, the regular monthly payments eat up more of the principal helping your efforts snowball as time goes on. So if you’re attempting to pay off $200,000 over the next five years, you don’t simply divide the balance by 5 which would be $40,000 per year. You actually can plan on paying off a little less. You can use a true mortgage calculator to figure out the exact amounts, but for example purposes, let’s say the number is $35,000 per year. If your goal is to pay off a $200,000 balance within the next five years, then you can add the $35,000 goal to your short-term annual goal.
Another long-term goal might be to accumulate $500,000 in additional investable assets over the next 5 years. Similarly, we can divide this into annual chunks to establish more shorter-term goals. Again, compounding interest will help us here, so we actually don’t have to contribute a full $100,000 per year to hit the $500,000 mark in five years. Maybe let’s assume a 7% annual growth rate of our investments. As such, we can take a look at the following table to see how this can play out over the next five years.
As you can see in the above table, you don’t need to save $100,000 every year to hit $500,000 in five years. With a 7% annual growth rate, you can save $87,000 each year to hit your target amount. While this example might seem extreme and unrealistic to you, you can use numbers that make more sense for your personal situation. The point is that you can deduce annual targets in a similar fashion by working backwards from your five year goal.
Hitting your financial goals
How can you hit aggressive financial goals? If you’re setting pretty aggressive financial goals, it’s going to come at a cost and require significant discipline and decision making on a day-to-day basis. First, you’ve got to remove the large obstacles from your life. For some this might be a huge car payment that’s crushing your ability to stash large chunks of money away. Or maybe it’s private school tuition. If you can restructure a few things to free up cash in your life, that’s a huge first step.
Of course, smaller day-to-day decisions such as sticking to your grocery budget and things of that nature are important, but for the numbers we’re talking about, it’s difficult to thrift your way to significant financial goals (at least over a short period of time).
The other way to stash large amounts of money is when you get bonuses, commissions or other large inflows of cash. While these can be tempting times to upgrade your automobile, go on a fancy vacation or buy a boat, these are the times that you can take large steps forward in your financial life, by stashing that money and acting like you don’t even have it. Get a $50,000 year-end bonus? Throw the whole thing into your investments. Sure, putting $1,500 away every month in a 401(k) is a really good idea, but when you can drop $50k into your investment account overnight? That moves the needle!
Lastly, stick to your plan and have the discipline to keep going year after year. If you’re making smart moves, it’s amazing to see them add up to some pretty significant figures in just a few years. Hitting a five year, long-term financial goal that you weren’t sure might be possible is amazing. Then, you’re in an even better place to make newer and more impressive goals for the next five years.