As we wrote recently, knowing what your financial dreams are is one of the first steps in mapping out a plan to achieve your objectives. However, after figuring out your goals, it’s common to experience questions such as:
- What are my next steps?
- How much should I contribute to my dreams each month?
- How do I create a plan?
Coaches in all industries often use the “S.M.A.R.T.” acronym while setting plans and goals with clients, and financial goals are no different.
What does S.M.A.R.T. mean?
Specific. Measurable. Attainable. Realistic. Time Bound.
When setting financial goals always strive to be realistic.
We tend to overestimate how much we can save, underestimate how much we spend and before we know it our goals are out the window. It is not beneficial to overestimate how much we believe we can save.
Wouldn’t overestimating just increase my chance of saving? Wasn’t I just aiming high?
We haven’t found that to be the case. Instead it leads to frustrated. We’re then tempted to just throw in the towel and say, “Oh well, there’s always next month.” Well, next month could turn into the next and pretty much a whole year could go by.
How do you set realistic goals?
- Calculate how much you really spend. Knowing how much you spend each month will guide you as you determine how much you can truly contribute towards your goals. As we previously wrote, one problem he consistently sees is families only budgeting the “planned” expenses. He conservatively estimates that over 80% of the households with whom he’s worked during his career could not guess within 25% how much money they spend each month.
- Start small. If your goal is to contribute 10% of your paycheck towards your retirement account, don’t jump from contributing 3% to 10%. Instead, begin by increasing your contribution to 4%. Starting small will get you in the right mindset to put aside a little bit each month, and let you see if your budget has more wiggle room.
- Increase your goals incrementally. After a few months of consistently meeting your goals, increase your savings benchmark by a percentage or two – enough that you’re escalating your savings, but not enough that your budget will be drastically impacted. For instance, as in the above example, if you feel comfortable with 4%, try increasing your contribution to 5%, then after a few months increase it to 6% and so on, until you feel comfortable reaching your goal of 10%.
- Be prepared for adjustments. Monitor your spending regularly to make sure you’re on track. If you’re consistently over in one area of your budget, be honest with yourself. For example, I used to always exceed my grocery budget. Every month I had an excuse or reason why that month was different. I finally realized I just needed to increase my grocery allocation and decrease my spending in another area, or I would find myself in the same situation month after month.
At Legacy Next, our financial forecasting can project how much you need to save to fund all of your goals, as well as show you the impact that achieving short term goals have on your ability to achieve your long-term ones. Helping people build, secure and enjoy their financial lives is our passion. Let us show you how.