The beginning of a new year is always associated with New Year’s resolutions and is the perfect time to re-focus on the financial goals you may have let fall to the wayside in 2021. The following article will outline some of the ways you can formulate robust financial goals and how to work towards achieving them this year.
How do I set goals?
In order to work towards anything, it is important to define what you wish to achieve and in what time frame. If you already have some goals in mind, it may be a good idea to ensure they are SMART. This means they must be specific, measurable, achievable, relevant and time-bound. For example, the financial goal to ‘save more money’ is likely going to be more difficult to achieve as you are not giving yourself a timeframe to achieve the goal and it is not measurable as you have not stipulated how much you want to save. This is going to significantly reduce the likelihood of you being able to achieve this as you don’t have a specific course of action in place.
Another important step in developing your goals is categorising them. This can include identifying whether they are short, medium or long term goals. Short term goals are typically six months to five years, medium-term goals are around five to ten years and long-term goals have a timeframe of more than 10 years. This will help to provide you with greater clarity on what action you need to take now to ensure that the goal can be achieved in the relevant timeframe such as buying a house or retirement.
In conjunction with this, it is also a good idea to provide each of these goals with a priority rating, such as very a very high priority, high priority or a moderate priority. This will allow you to remain focused on your most important goals if you are faced with a decision that means you have to trade off or make a compromise.
What are some good financial goals to have?
The type of goals that individuals set are going to be specific to their circumstances and current financial position. However, below are some good goals to have in place if you wish to become more familiar with your financial circumstances and to ensure that you are on track to where you wish to end up in the future.
- Budgeting/Everyday Finances
As aforementioned, many people have the goal to ‘save more money’ but this must be a more specific goal that you can work towards every day. This is where formulating a budget can be very helpful as it will allow you to understand your cash inflows and outflows more comprehensively. Once you have done this you can establish how much money you wish to put away every week or month into a savings account that can be used to reach your other longer-term financial goals. It will also allow you to keep track of your expenses and re-evaluate some of your spending habits if they do not align with your financial goals. To access the EPG Wealth budget sheet for free, please click to here to enquire.
- Cash Reserve
A great short-term goal is to establish a cash reserve which refers to the money kept on hand to meet any short-term or emergency funding needs. This will allow you to cover any urgent or unexpected costs that may arise without swallowing up the income that you use for your everyday living expenses or debt repayments. A general rule of thumb is to have enough money in your cash reserve to cover three months of expenses. A way to ensure this goal is measurable and realistic is to identify what amount per week you will put into your cash reserve to ensure you have the amount you need.
- Pay off debt
A common financial goal is to pay off debt, whether this is a generic loan, a credit card or a mortgage. When identifying which kinds of debt to prioritise, it is important to distinguish between good and bad debt. Good debt refers to the debt associated with borrowing money for the purpose of purchasing an asset that is likely to increase in value or produce an income, or debt that has a low/no interest rate (less than 5%). Conversely, bad debt refers to spending outside of your means or a loan with an interest rate of more than 5%.
If you have the latter it may be a good idea to pay this off and prioritise this goal ahead of other financial objectives. This can be factored into your budget by allocating a set amount of your income each week or month to reduce this debt. If you have ‘good debt’ such as a HECS loan you may wish to continue slowly paying it down and considering how else you can use any leftover cash you have such as investing.
Although investing is a risky activity, there are many significant advantages of investing whether that be in the stock market or in property. To read more about the differences between these two forms of investing, click here. With inflation steadily rising, investing provides individuals with the opportunity to ensure that their money keeps up with the increased cost of living. If you wish to invest but do not have the time or patience you may wish to consider a strategy that allows you to set and forget – this is where EPG Wealth can help.
If you were to invest $50,000 today and contribute $1,000 every month, over a 20-year period at an annual rate of return of 6% p.a., by 2041 you would have $601,784, with more than half of this amount ($311,784) being made up of compound interest. Hence, reinforcing the importance of having an investment goal to make sure your money is working as hard as you.
If you are just starting on your investment journey or would like to be more disciplined with your investing strategy in 2022, please click here to organise a 20-minute complimentary consultation with an EPG Wealth adviser.