Have you taken a hard look at your personal finances recently? Now, while it’s still early in the New Year would be a good time to review what you accomplished last year and to think about what you could do better in 2014.
The importance of having goals
We hope you have a budget because budgeting is the only way to control your finances. If you don’t have a budget, you can’t know where your money’s going. And if you don’t know where your money’s going, it’s just about impossible to be a good money manager.
Many people start the New Year with good intentions – to sit down, analyze their spending and make a budget. But most financial experts say that’s a mistake – that if you truly want to develop and stick to a budget the first thing you need to do is set your goals. What do you suppose is the goal of all 32 NFL coaches? It’s the same thing, to get to and win the Super Bowl. This is what keeps them motivated throughout all those days of off-season activities, workouts, coaches’ meetings, film reviews and all of the hundreds of other tasks associated with coaching a pro football team.
You might never coach an NFL team but you also need goals to stay motivated and on track.
First, create goals
Many people start by keeping track of their spending for a few weeks or a month and then make a budget. Unfortunately, these people are almost doomed to fail because that’s not how to start. You need to first create goals. If you haven’t identified goals it’s a lot like trying to drive through a strange city without a map. You not only wouldn’t know which streets to take, you might not even know when you’ve reached your destination. In fact, you really need short-, mid- and long-term goals.
The three types of goals
These are goals you can realistically expect to attain within the next 12 months like saving for a vacation, redecorating a bathroom or paying down your credit cards. Mid-term goals are those that would take one to five years to accomplish such as paying off all your credit card debts or student loans or getting a new car. Long-term goals are those that require more than five years to achieve like a college education for your kids or a great retirement.
One success leads to another
When you have these three types of goals, you’re more likely to succeed because they tend to work in coordination with one another and one success leads to another. As an example of this, suppose that saving for a house is one of your mid-term goals. This then would be the foundation for your long-term goal of being a homeowner.
The first important ingredient
The first important ingredient in successful goal setting is that they need to be attainable and are not too far out of your reach. If you only set goals that are in the far future like retiring at age 55, you could get frustrated as the months and years go by and you don’t see that you’re making real progress towards achieving them.
A good way to set and remember your goals is to think S.M.A.R.T.E.R.
S = specific
First and foremost your goals need to be specific so you can create a plan (budget) to accomplish them. You should use the Ws or What you want to accomplish, Why you want to accomplish it and What’s involved such as “I want to be totally debt free in two years.”
M = measurable
Your goals also need to be measurable as in a specific amount of time like “I will pay off my first credit card before September 15.”
A = action
This is how you will take action towards achieving a goal as in “I will pay $200 on that credit card bill every month beginning the 15th of this month.
R = realistic
It’s important to have goals that don’t set you up to fail, which can happen if you’re not realistic. In the example given above, it wouldn’t be realistic to pay $200 a month on that credit card bill if you have only $150 a month available after your monthly expenses.
T= time oriented
This means setting a reasonable amount of time to achieve your goal. You might want to be debt free in two years but is this a reasonable amount of time given your financial situation? If not, you’re bound to fail, which could throw you completely off track.
E = evaluate
Be sure to sit down and review your goals on a regular basis. Are there changes you need to make? Now that you’ve had time to work on a goal such as becoming debt free in two years, you might see that this just isn’t realistic.
R = revise
When you re-evaluate your goals periodically, this offers the opportunity to revise and make changes in them depending on what you’ve learned since you created them. If it seems you just won’t be able to accomplish one of your goals in two years, you could revise that to three – instead of losing hope and giving up.
There’s another acronym for success in setting and achieving goals called S.M.A.R.T. as explained in this short video.
Your financial goals should also be flexible so that you can change them as the economy and your financial situation change. The goals you set when you are in your mid-twenties might not be at all relevant by the time you reach fifty. Maybe one of your kids decided on a career in the military instead of going to college so that your college fund has become less important. Maybe you’ve become so successful that you’re no longer worried about saving for retirement. Or maybe you’ve suffered a traumatic event like a divorce or death. The point here is that you need to be flexible so you can make revisions to your goals as your life changes.
If you haven’t already discovered this yourself, we have bad news. New Year’s resolutions generally don’t work. Many experts believe that a better way to start the New Year is with a to-do list. It should be both discrete and actionable as suggested in an above paragraph. The items on your list also shouldn’t take very long. Then, as you tick them off one by one, you should be able to see a nice improvement in your finances. Having said that, here are five things you could put on this year’s to do list:
Get a record-keeping system. The best of these are Quicken and Mint. However, there are other good applications such as Mvelopes, Spendee and and Budgt that you could use on your favorite device and become a better financial manager.
Learn one new thing every week. What’s a debt-to-income ratio or a price-earnings ratio? How much life insurance do the experts say you should have? What’s a 529 plan? The more you learn about financial topics such as these, the better you will become at managing your money.
Increase your 401(k) contributions. Your employer may have increased the matching contributions it makes to the company’s 401(k). Add as much money to the plan as you can afford that your employer will match. This is not only a good way to save for retirement but will also save money on your taxes.
Get a better credit card. If you’re using the same credit card that you’ve had for years, you’re probably not getting the maximum amount of rewards. The card issuers have been increasing their rewards programs in recent years. Go to a site like lowcards.com or bankrates.com and see if you can’t find a card with better rewards and that suits the way you spend. You might also get a second card from a different credit card issuer so that you won’t be card less in the event your primary account gets hacked and canceled.
Comparison shop. Whether it’s your automobile or homeowner’s insurance policies, your cable provider, your entertainment or your health insurance, you need to shop around. However, don’t think that you have to do this all at once. You could devote January to comparison-shopping for your automobile insurance, then February to shop for health insurance on healthcare.gov. Then in March, you might review all of your television costs to see whether you might be able to cut the cable and go to a cheaper streaming device like Chromecast or Apple TV. April might be a good time to look at how much you’re paying for utilities and if there could be a more energy efficient solution that would save you money … and so on.