How to Budget Step 3 – Setting Goals

Setting one to three realistic financial goals is critical to financial success.  In Steps 1 and 2 of this series, I talked about creating systems for tracking and recording your expenses.  This week, I’ll finally focus on the first step I take in budgeting (as described in my very first post), setting goals.

This Week’s Budgeting To Do List

Before getting to the discussion of setting goals, here are your budgeting tasks for this week:

  1. Continue using and refining your expense tracking system.
  2. Continue to enter your expenses into the spreadsheet.
  3. Set three-to-five-year goals.
  4. Convert the goals to short-term, specific action items.

Set Three-to-Five-Year Goals

My first step in the budgeting process is to identify my financial goals.  These goals are statements of what I want to accomplish with stated time frames.  Here are some examples of different goals you might have, depending on your age and your current financial situation:

  1. For people who have a lot of student loans, credit card debt, car loans and/or other loans: I want to be debt-free, other than my mortgage, in five years.
  2. For people who can’t quite make ends meet: I want to create a budget and spend less than I make.
  3. For people who don’t have any credit card debt and can cover their expenses, including any loan payments:

a. I want to be able to buy SOMETHING I WANT or take a vacation to SOMEPLACE I WANT TO GO within three years.

b. I want to be able to buy a $250,000 house with a 10% down payment within two years.

c. I want to be able to take maternity/paternity leave and support SOME NUMBER of children starting next year.

d. If you are under 40: I want to start saving as much as possible for retirement.

e. If you are over 40: I want to save enough so I can retire at AGE with SOME AMOUNT of money (before inflation) available every year.

Pick no more than three goals, preferably only one or two, to target over the next few years.  Make sure they are realistic.  For example, if your student loans and credit card debt are a substantial portion of your income, it might be unrealistic to set a goal of paying them off in one year (unless you want to take the FIRE concept to an extreme).  Or, if you are 50 and have no retirement savings, a goal of retiring at 55 is likely unrealistic unless you have another source of income.

Turning Goals into Actions

Now that you know where you want to go, you need to identify what you need to do this year that will allow you to achieve your goals.  The list below gives some ideas for the sample goals above.

  1. Goal: I want to be debt-free, other than my mortgage, in five years. This year’s action items:  I will pre-pay 20% of the principal on all of my debt in addition to the regularly scheduled payments.  I will also pay all current charges on my credit card every month and not take out any other loans.
  2. I want to spend less than I make. This year’s action items: Create a budget to see where I can cut expenses.  Find an additional source of income that will cover the expenses that exceed my current income.
  3. For people who don’t have any credit card debt and can cover their expenses, including any loan payments:

a. I want to be able to buy SOMETHING I WANT or take a vacation to SOMEPLACE I WANT TO GO within three years. This year’s action items: I will set aside designated savings equal to one thirty-sixth of the cost of my purchase every month.

b. I want to be able to buy a $250,000 house with a 10% down payment within two years. This year’s action items:  I will research the costs of home ownership, including property taxes, maintenance, insurance and mortgage payments.  I will set aside designated savings equal to $1,041 ($250,000 x 0.10 / 24 months) every month.  If the total monthly cost of home ownership is more than the $1,041 a month I am saving for the down payment, I will make sure there is room in my budget to cover those expenses once I buy the house.

c. I want to be able to take maternity/paternity leave and support SOME NUMBER of children starting next year. This year’s action items:  I will research the costs of having children, both the medical costs associated with child birth and the costs of supporting them when they are young.  I will learn about how much, if anything, my employer will provide for salary replacement for maternity/paternity leave.  I will set aside designated savings equal to one twelfth of the difference between my normal wages and what my employer will pay during my maternity/paternity leave.  I will make sure I can adjust my budget for next year so it covers the costs of having children.

d. If you are under 40: I want to start saving as much as possible for retirement. This year’s action items:  I will put retirement savings in my budget.  I will read Susie Q’s post (when it is posted) about various retirement savings vehicles (Roth or Traditional IRAs and 401(k)s in the US or group or individual RRSPs or TFSAs in Canada) to figure out which best suits me.  I will make contributions as budgeted.

e. If you are over 40: I want to save enough so I can retire at AGE with SOME AMOUNT of money (before inflation) available every year.  This year’s action items:  I will figure out how much money I need to save every year to meet my goals, including reading Susie Q’s posts on how much that is.  (See the last section of Susie Q’s post on Young and the Invested and check back for future posts.)  I will put that amount of retirement savings in my budget.  I will read Susie Q’s post (when it is published) about various retirement savings vehicles (Roth or Traditional IRAs and 401(k)s in the US or group or individual RRSPs or TFSAs in Canada) to figure out which best suits me. I will make contributions as budgeted.

One Last Tip

It is good to revisit your financial goals every year or two.  In some cases, you won’t have made progress towards them and you’ll want to figure out why and fix the problem or revise the goals.  In other cases, you’ll have made significant progress or attained your goals and can set new goals.

Download Budgeting Spreadsheet Here

 

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