Financial goals are targets you want to achieve driven by specific future financial needs. These include:
- Saving for a comfortable retirement.
- Saving to send the kids for tertiary education.
- Saving to buy a beautiful home.
Every financial goal has a time horizon. A goal can be short-term, medium-term or long-term.
- Short-term goals are those you want to achieve in under two years.
- Medium-term goals are those you want to achieve in three to five years.
- Long-term goals are those you want to achieve in five years or more.
Financial goals are important to ensure you build wealth for future financial needs. These include:
- Increasings savings and investment funds.
- Reducing or eliminating credit card debt.
- Getting adequate protection for the unexpected.
- Building wealth including for children’s education and retirement funds.
- Reading to improve financial literacy.
Put it in writing
It is important to write out your goals as it allows you to regularly review them. It also increases your likelihood of achieving them.
Plan your personal finances and budget so you do not overspend and impulse buy. When you don’t understand where your hard earned cash is going, it’s difficult to make smart choices on managing your money.
Setting financial goals is an important step toward reaching financial independence. Otherwise, you are likely looking at a future where you are forced to work after retirement age to cover your expenses.
Update your information every six months or annually, as well as review your goals and your progress.
How and what financial goals to set
1. Create a budget
A budget is about crafting a personalised financial monthly guide allocating income prudently towards wealth building and financial goals.
You need to know where you are now before knowing where to go and how to get there. This simply means setting up a budget which is one of the best tools to start managing your finances.
There are many free budgeting programmes/software you can use to track your budget. A more conventional way is to use an Excel spreadsheet budget template.
Keeping track of your expenses will show your money outflows. With this information, you can decide how these potential funds are better used.
2. Set up an emergency fund
An emergency fund is money you set aside to pay for unexpected expenses. Start with a small target to cover at least three months’ expenses. You can expand the fund later to cover bigger financial surprises such as loss of employment.
“Pay yourself first”. Every month, automate to transfer a part of your salary (for example 10-20%) to a separate bank account.
Consider restricting easy access to this account (no access to the ATM card and online banking) to help you avoid easily dipping into this fund.
3. Review your insurance needs
Is it adequate? This is especially if it has been a few years since your last review or if you’re getting married or welcoming a new baby.
Check with your personal finances advisor or insurance agent if additional life insurance is required. A good reputable advisor will be able to give you proper advice without pushing you products you don’t need.
Make sure you can afford the premium. You can also increase the coverage later when your earnings increase.
4. Get a full medical checkup
You need to be healthy to earn money. You are likely the biggest income producing asset you have. Arrange for a full medical checkup to examine your health. Are you fit? Do you have an exercise regime?
5. Clear credit card debt
Credit card debt attracts very high interest rates. Commit to clear off the debt of one credit card.
It can appear overwhelming to consider paying off your whole debt. This takes months or years. Instead, select one thing to repay. Look at your smallest month-to-month payments. Plan to clear off the smallest owing as soon as possible.
6. Stop credit card usage
If you carry more than one credit card, relinquish usage of the credit card you plan for debt clearance.
It is pointless if you plan to clear the card debt but at the same time continue racking up debt. Leave the card at home or put it in an ice block in the freezer. Better still, cut the card in two.
With the popularity of online shopping rising, consider deleting automatically stored card information.
7. Reduce spending
For example, dining out is often a major expense so whenever possible, bring food from home or cook your own meals especially over weekends.
Scrap unused gym membership. You can have your own gym at home with one pair of dumbbells, some weight plates, and a barbell.
Avoid coffee-place addiction. Premium coffee sold in cafes cause many times more the price of the same cup if you make it yourself. Do you really need to pay that much for a cup of coffee?
8. Open a new savings account
Dump in any amount you can. Arrange to have an account passbook without online access. Make access to this account difficult. Your emergency fund can also be parked here.
9. Automate regular bill payments
Putting bill payments, especially fixed regular monthly payments such as car loans and housing loans on autopilot is a simple method of dealing with paying bills regularly on time. You also avoid late charges.
10. Catch-up on overdue bills
This is the worst leakage to have. You are paying for nothing. Stop the leakage now. List out all bills and prioritise payment. Find the money or speak to the owed party for arranging a payment plan.
11. Meet with a personal finances advisor
Meeting a professional advisor helps you have a clearer picture of managing your personal finances. Your discussions will give you an idea of your net worth, risk management, savings/emergency funds, investments, diversification and much more. Discuss the setting of goals, options, and strategies to adopt.
Start working on your short-term financial goals today
Start with short-term goals first as these are simple and achievable. However, you do need to give 100% commitment and focus.
Once you achieve these short-term targets, you will have the knowledge and confidence to tackle medium and long-term goals.
Immediate steps to take after reading this article
- •Write down five key short-term goals to focus on.
- Get a budgeting/expenses/personal finances software/spreadsheet.
- Save RM500 right away in your (new) emergency savings account.
- Adjust your spending by reducing unnecessary expenses.
- Meet with a Personal Finances Advisor.
This article first appeared in https://mypf.my