It’s the new year, which means it’s time for resolutions. Unfortunately many people set goals that are much too broad, like “this year I’ll lose weight” or goals that are too demanding, such as “I will get up off this couch and workout 3 hours every day.” The same is often true with setting financial goals for the new year. So how can you set specific practical financial goals that are challenging and worthwhile, yet actually achievable?
Know where you are
It’s hard to know what kind of goal to set if you don’t know your starting point. When you want to lose weight, you begin by stepping on the scale. So if you want to save more, you need to know exactly how much is in your bank account, and how much you spend each month. If you want to save for a trip or a specific purchase, you need to know how much your goal costs and how much you already have saved toward the goal. So it’s time to look at your bank accounts and take notes. If you want to set a goal around your budget consider creating an account with a service that ties into your bank accounts and tracks spending for you. Here’s a quick break-down of a few of these:
Mint: By far the most well-known budget tracker out there. It’s free to use (although they advertise to you pretty aggressively). It’s good for automatically assigning spending to different categories and letting you know how you are doing relative to your budget for the month. Where it falls short is in budgeting for non-regular expenses. Since the budget resets each month the system doesn’t let you, for example, build up a budget to buy Christmas gifts in November unless you set this as a goal. Another area where it falls short is setting savings goals without creating a new account for just that one goal. If you want to have a savings account for holiday gifts, vacation savings, your new car, remodeling the bathroom, etc. then the system works great. But if you want to earmark funds in one account, then it can’t tell how much of the account to earmark for each goal.
Mvelopes: The system has been around for a while, but not many have heard about it. This is the one my family uses. It will try to automatically assign spending, but you have to create the rules that allow the program to do the auto-assignments, and then approve the assignments. We manually assign spending to different areas so that we can assign spending at Costco to groceries, gifts, or wherever else it belongs. So you have to be more on top of your involvement with this system than with Mint, but it does allow you to set aside a budget and save it up if it isn’t spent. This is how we treat our individual fun money. I save mine month to month until I find a board game that I must have, or go to another BGG.con and use up the fun money that built up over several months. This is also now a paid service (we paid a lifetime fee once several years ago, but that’s no longer an option). The fee runs from $4 per month to use the basic system to $59 per month which comes with a budget coach.
YNAB (You Need A Budget): This is very similar to Mvelopes with the ability to set aside money for infrequent spending, or to have the excess budget roll-over from month to month. Both of these systems also allow you to reassign your budget from one area to another when you do end up overspending in an area so your total budget doesn’t suffer. YNAB costs $7 per month. If I wasn’t grandfathered into Mvelopes then I’d probably switch to this system; it just has a nicer user interface and walks you through the why of the system a little better. They also don’t charge extra for the debt paydown section or better support. (If you’re a college student you can get YNAB free for 12 months by emailing email@example.com with proof of current enrollment).
Know where you’re going
So now that you know where you are, you can figure out where you’re going. Based on your starting point, think about what a realistic goal would be for the new year. Your goal should be specific and achievable. While the goal of dropping 100 pounds in a year is specific, it’s likely not achievable if you only weigh 200 pounds. Similarly, setting a goal to pay off all of your debt this year is specific but not achievable if you have $200,000 in debt.
Let’s look at some examples of more realistic goals. If you’ve been paying your debt down by $2,000 per year, maybe set a goal to pay off $5,000 this year. If you’ve been able to save $500 a month into your 401(k), maybe set a goal of $800 a month. Like most goals, financial goals that stretch you are a good thing, but the bigger the stretch the more motivation you will need to get there.
Figure out how to get there
Now that you have starting and end points, you get to do some arithmetic to figure out how to get there. For single-year goals this is simple, but for longer-term goals the time value of money comes into play both for your savings as they grow based on your return, and for the inflation of the cost of your goal.
For now we’re just worried about the short-term goals. So if you want to go on a $2,500 ski trip at the end of next year, and you currently have $500 saved for travel, you’ll need to save $2,000 over 12 months, or $167 each month. If you put that money in an online savings account (as of me writing this Ally Bank is currently paying 1.25% on savings accounts), then you actually only need to save $165 each month to meet the goal.
Track your progress
With your plan in place, you now need to track how you’re doing on a regular basis. Monthly makes sense for most financial goals, unless you’re paid on a different frequency and you think about your budget bi-weekly, semi-monthly, or some other way. Put it in writing in a place where you see it often, like a post-it on your fridge or desk with your target and your current progress. For me I have a target for side-hustle earnings while I get my company up and running. I keep a running tally of my daily earnings against my goal on the back of a gas receipt in the car so that I can stay motivated and know when I’m having a good week, and when I’ll need to put in some extra time to reach my goal.
Have some fun
Make sure that your financial goals don’t strip all of the fun out of your life. Even when on a really strict budget, my wife and I have each had a little bit of fun money so we could go have coffee with friends, or save up to buy a new game. If you cut out all of the fun during the year, you run the risk of feeling trapped and demoralized when you’re not making progress as quickly as you’d like and then going on a spending spree and ruining any chance you had of meeting your goal. Think of the fun money as a small safety valve to keep that from happening.
Possible Practical Goals for 2018
If you’re having trouble thinking of financial goals to set for yourself for 2018 here are some generic goals to help:
Contribute $____ / ___% more each month to my 401(k)
Save $______ for a vacation with _________ to _________
Reduce my debt by $_____ / ___% during the year
Reduce spending on _______ by $_____ each month
Track my spending for ____ months then establish a budget (don’t forget to include once-a-year expenses)
I also have a Financial Ratios Scorecard that I use with clients. Here’s a copy so you can track your progress in these key areas.