Looking to set some new financial goals? These tips can help you create a realistic strategy to secure a better financial future.
A Guide to Creating Financial Goals
It’s no secret that the economy is in a strange place right now and quite frankly, we’re not quite sure when it will fully return to “normal.” The economic downturn has caused financial obstacles leaving many individuals feeling restrained and overwhelmed.
While consumer confidence is at an all-time low, it’s an opportunity for financial institutions to educate the public on their relationship with money. As a community bank, we put our customers, communities, and employees at the heart of everything we do—and by that same token, we want to help you navigate these difficult times.
While finances are not clear-cut, we can give you guidance to steer you in the right direction:
Get Organized
If you’re creating financial goals, you’re most likely asking the question: Where do I start? While it may seem minor, organizing your finances is a good starting point. Doing so will create an awareness of where you are financially and help you to better understand what needs to be done, in order to achieve what you want with your money. Unfortunately, this step is often overlooked, but it’s a critical foundational piece for establishing a secure financial future.
While situations differ, here are a couple of ways to get organized:
- Create a “home” for your financial documents and file them by subject matter. This can lead to an array of benefits such as; finding documents quickly, handling financial conflicts with confidence, and it helps others handle your financial affairs, if necessary, among other things.
- Track your spending. Knowing what your monthly expenses are, allows you to understand where your money is going and evaluate your current allocation of funds. So, for the next month, try keeping track of your spending, then you can move on to creating a well-thought-out budget.
- If you struggle with sticking to financial goals, consider opening multiple bank accounts for different purposes. Separating your expenses and spending accounts could better help to keep the budget sustainable. You can split your direct deposit, so the amount needed is allocated to the correct account. An accurate visual of your money can deter you from spending money needed elsewhere.
- Note: We would like to note that depending on the institution, some accounts may carry minimum account balance requirements, monthly fees and other fees associated with the account(s). Please check with your financial representative to ensure if this recommendation would be a feasible solution for your needs.
- Think about using a bill-pay system for your fixed expenses. The advantage here is that you avoid any missed payments and late fees. In addition, keeping up with your payments has the potential to boost your credit score.
Create a Budget
The next steppingstone is creating a well-thought-out budget. This tool can help to ensure that you’re not spending more than what you’re making. Systematically reviewing your estimated numbers versus actuals, allows you to make decisions based on your goals.
The primary budget categories include income, fixed expenses, variable costs, and debt payments. Each category and subcategory will depend on your needs, wants, and goals. Keeping this accurate and realistic is essential to maintaining momentum and building on it.
There are different strategies to examine when creating a budget, and it may change over time, depending on your circumstances. Some recommend the 70/20/10 rule, where 70% of your income goes towards your monthly bills and everyday spending, 20% goes towards savings and investing, and 10% goes towards debt repayment. Others recommend the 50/30/20 rule, where 50% of your income goes towards needs, 30% goes towards wants, and 20% goes towards savings and debt repayment. Of course, these percentages are simply a guide, finding what works for you is the intention. The key is prioritizing your finances, assessing costs and benefits, and restraining your spending.
Start Saving for an Emergency Fund
We’ve all witnessed first-hand how the economy can affect finances. Being proactive and building an emergency fund will stop circumstances from dictating your economic well-being.
- Start with setting a realistic, achievable goal for this fund. It’s standard to have three to six months of expenses as the target for this savings. Remember that this doesn’t need to supplement your whole income, just your monthly expenses. Try calculating this number to know what is sufficient for your needs. After you have the end goal number, you can look at your budget and see what you would be comfortable contributing monthly. Calculating what you can contribute monthly will then tell you how many months it will take to reach your emergency fund goal.
- Consider setting up a direct deposit, so your monthly contribution goes straight into your savings account. Automating the process simplifies it and keeps you on track toward your goals. Most employers allow more than one direct deposit, but that would be an excellent question to ask if you are contemplating this.
- Try gradually increasing your contribution in small increments if your budget allows. Implementing this into your plan will aid in reaching your goal faster while keeping it less noticeable.
A cash reserve will protect your finances when encountering unexpected expenses or financial emergencies. Avoiding situations where you have no other option than to take on more debt is vital.
Choose a Strategy to Pay Down Debt
It’s no secret that we’ve seen a hike in interest rates and while it doesn’t affect every type of debt; many individuals are feeling the impact of it. Paying down your debt can increase your financial security, but it’s crucial to have a plan of action, as there are many ways to do this.
The first option is to pay off debt with the highest interest rates, as this allows you to reduce the amount of interest you will pay throughout the life of the credit. Typically, you see the highest rates on credit cards, student loans, auto loans, personal loans, outstanding bills, medical debt, or anything with a variable interest rate. This option will be the best course of action if you want to save as much as possible on interest charges. The flip side is that if your most significant debt also has the highest interest rate, it could take more time to pay it down before moving on to the next.
Another effective strategy includes paying off your smallest debt first and working upward. The idea behind this strategy is that you’ll have small “wins,” which will keep you motivated to accomplish your goals. This strategy might be the best way to go if you are overwhelmed by debt. However, this fails to consider the money you would save by paying higher-interest accounts first.
Aim to pay more than the monthly balance due. The extra money will go towards the principal of the balance resulting in less interest being paid as a whole. This tactic doesn’t necessarily have to be a lump sum every month–try paying the minimum balance off first and then after all your needs are taken care of, add another payment later in the month.
Refinancing or consolidating your loans can be beneficial if you receive a lower interest rate. The monthly payment might be less than what it was, but if the life of the loan is extended longer than the original loan, you might be paying the same amount or more. Therefore, it’s important to look at the total cost of borrowing instead of just the monthly payment.
Create flexibility in your budget by paying off debt and ending your monthly payments. While this could be either a short-term or long-term goal, you’ll see many benefits throughout the process. Minimize interest which will bring you savings, improve your credit score, and start investing in your future.
Conclusion
Creating a financial plan is vital now more than ever, as we face economic uncertainty. Doing such will allow you to accommodate changes in market conditions or life without the added stress of finances. We encourage you to paint a comprehensive picture of your current finances, financial goals, and the strategies to achieve these goals. A working financial plan is an essential part of financial success.
While everyone’s situation varies, we stand in this together. Only time will tell what the economy will bring, but one thing is sure, navigating this adversity is a partnership. Working diligently to help our community’s preserver during this economic downturn is where financial institutions can take action.
