Setting Goals

About 8 minutes
 
Time for some honest talk. Before you do anything else, we need to talk about setting some goals. We know, some of you are natural goal setting overachievers, and that’s great. But, for the rest of us equally delightful procrastachievers, it takes a little more work. And that’s okay too. A little work never hurt anyone.
 

Let your life goals dictate your money goals

While this may be a really awesome website about money, we’ll be the first to admit that money is just a means to an end.
 
What this is really all about is life. Living life, enjoying life, sometimes hating life. But to live the life, we need the money. Which means we have to think about how much money we’ll need to do the things in life we want/need to do.
 
However, you might not know exactly what those lifey things are or exactly how much they’ll cost. That’s alright. Setting goals is not about figuring out down to the nickel how much money you’ll need forty years from now. It’s about coming up with reasonable estimates of how much certain things will cost, and coming up with an equally reasonable plan to make your money rise to the challenge.
 
And yes, you might realize you won’t be able to afford the house with the helipad as soon as you thought. But as you really think about what you want in life, you’ll start to see what’s most important to you. And those are the things that should take financial priority.
 
So, what do you actually do to achieve those dreams?
 

Grow your assets to build wealth

No, it’s not a dirty word. An asset is anything that stores wealth. This would include money in a bank account, land, or even fancy artwork (although the amount of cash you could get for your fancy artwork is less predictable). Ideally, assets also grow your wealth by generating income or by increasing in value, like investments in stocks and bonds.
 
Which brings us to one of the most important concepts in personal finance.
 

***Not only do you want to consistently save money, you also want to use those savings to buy wealth generating assets.***

 
That way, the money you save can then earn even more money for you. And that money can earn even more money. And THAT money can earn even more money….you get the idea. It’s like having little money minions doing your bidding for you.
 
The goal is to eventually accumulate enough assets to be able to live off the income they generate (and not have to work anymore). Of course you might like to work, which is great, but it’s good to at least have the option for financial independence if you want it. And at some point you’ll have to retire whether you want to or not.
 
So if there’s truly one “secret” to getting rich it’s this. Make money, save money, and invest that money in assets that will make you more money. And keep doing it.
 
But, we should also mention that not all assets are equally good at storing and creating wealth. While your car is technically considered an asset (you could sell it for cash if you needed to) it’s less liquid. This means it could take more time and effort to convert it into cash. Even more importantly, it also depreciates, or loses value over time.
 
If you want to grow your wealth (which of course we all do, right?), you’ll need to buy assets that appreciate in value over time, or at least don’t depreciate.
 

Reduce and limit your liabilities

As important as your assets are, they’re only half of the equation. You also need to consider your liabilities.
 
A liability is anything that will cost you money in the future, like outstanding debts or unpaid medical bills.
 
You can think of a liability as an asset’s evil twin. While your assets are hard at work storing and generating wealth for you, your liabilities are mischievously draining your finances (because they tend to charge interest).
 
You’ll want to keep your liabilities under control and work towards paying them down. For the most part, your liabilities will be in the form of debt, which we cover in more detail in the sections on borrowing.
 

See where you stand with your personal balance sheet

As you think about your financial future, it’s important to know where you stand today. And a helpful way to do this is with your personal balance sheet, which combines your assets and your liabilities.
 
Here’s how you make your balance sheet;
 
1) Make a list of all your assets (bank accounts, investment accounts, etc)
 
2) Make a list of all your liabilities (outstanding debts)
 
3) Add up your assets, subtract off your liabilities
 
The difference is your financial net worth, which will be positive if your assets are greater than your liabilities or negative if your liabilities are greater than your assets.
 
So if you want to increase your financial net worth, you need to either increase your assets, decrease your liabilities, or ideally do both.
 
Personal Balance Sheet 2
 

What about a home?

If you own your home, we usually include it on the asset side of the balance sheet because it stores wealth and home prices tend to increase over time (although they certainly can fall too). However, your home deserves a little more thought for two big reasons:
 
1) It’s usually difficult to convert your home into money you can spend. You would have to sell it and find a new place to live, which will take time and cost money.
 
2) There are costs associated with owning a home, like the interest expense on a mortgage, maintenance expenses, and property taxes. And typically, the more expensive the home, the higher the costs.
 
So since buying a more expensive home doesn’t really make you richer the way having more stocks, bonds, or cash would, you should think of a home as being asset-ish. It’s kind of like an asset, but also part living expense.
 
All in all, it’s alright to put your home in the asset column, but don’t forget to put your mortgage on the liability side too.
 

Figure out where you are heading

After you’ve taken an inventory of your assets and liabilities with your personal balance sheet, it’s time to think about what you want to accomplish with your money.
 
For the most part, we’re going to cover goals that increase your wealth by either increasing your assets or reducing your liabilities.
 
This might include:

• Paying off credit card debt (reduce liabilities)

• Paying off student loans (reduce liabilities)

• Saving for an emergency fund (increase assets)

• Saving for a home (increase assets)

• Saving for retirement (increase assets)
 
If you aren’t quite sure what goals are right for you, don’t sweat it – according to a national survey, only about half of Americans “set long term financial goals and strive to achieve them”. As you work through the rest of the content, we’ll go into more detail on these goals and others. And hopefully your personal goals will become clearer.
 
Of course you’ll also have some other financial goals that don’t exactly increase your financial net worth, like saving up for a sweet vacation. These are important goals too (remember, we did say money is just a means to an end). Just be smart about balancing these goals with the more adulty ones.
 

What if I have too many goals?

Right, we know this is likely, and you might not have enough money to go around to all of them at any given time. So you’ll need to do a little prioritizing.
 
In general, you’ll want to focus on the most urgent goals first, like building up some emergency savings or paying off credit card debt if you have it.
 
And don’t get discouraged if you feel like you aren’t making enough progress on all of your goals either. Building your wealth takes time. Be patient, stick to your plan, and things will work out. We’ll offer some more suggestions on how to prioritize your goals throughout the site.
 

Make your goals concrete and set milestones

It’s important to make your goals concrete and actionable with a clear objective in mind. Otherwise it can be hard to tell if you’re making progress.
 
The more specific you can get, the better. For example;
 
Bad goal (too vague): Save more money for emergencies
 
Good goal (specific): Save $2,000 for emergencies over the next 18 months
 
Also, looking at a big, scary, intimidating goal can feel a little overwhelming. So you may want to break them up into mini goals by setting milestones. This will be particularly helpful when you work on longer term goals.
 

Quick Tip: Automating your finances, can help make sure you’re making consistent progress on your goals.

 

Review, adjust, repeat

We should mention that setting financial goals and then forgetting about them won’t do you too much good. Do not set it and forget it. Write them down, like on your phone, or on your computer, or even on paper (whatever that is). Then make time to review your progress periodically. Here are some things to think about;
 
1) Make sure your goals are still relevant. Life is constantly changing and our financial needs will change along with it. Make adjustments as needed.
 
2) Be prepared for some uncertainty. You can think of planning as a best guess, but it’s still a guess at some level. Unexpected things will inevitably pop up, some good, some bad. So you should build in a cushion with your estimates and allow for some flexibility.
 
3) Don’t forget to reflect on your successes. It’s easy to be overly critical of bad financial decisions, so it’s important to take pride in your wins and celebrate them.

 
Setting goals won’t transform your financial situation over night. But if you stick with your plan, you will start to see real improvements. Keep at it!
 
 

Key Take-Aways

1) Base your financial goals on your life goals.

2) Grow your assets, which store and grow wealth.

3) Limit and reduce your liabilities, which must be paid in the future.

4) Set concrete and actionable financial goals and review and adjust them over time.

5) Plan for some uncertainty.

 

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