Three action steps for setting financial goals in the New Year!
To help you take charge of your finances in 2010, we’re going to address the five pillars of personal finance, one at a time. So this post is the first of a five-part series. Each topic will help you build a strong financial foundation by setting goals, saving, investing, being properly insured, and reducing your taxes. The topic we’ll cover today is about setting financial goals.
How to Improve Your Finances in 2010
The first step to creating financial goals for a New Year is to evaluate the old year. Ask yourself what went right and what went wrong over the past 12 months. Maybe you didn’t save as much for an emergency fund as you’d planned. Perhaps you were unemployed for some time and got really behind on paying your bills. Now’s the time to make peace with the past and to get serious about creating a better financial future.
Decide what you’d like to accomplish in both the short-term and the long-term. For example, a good short-term goal might be to pay off a credit card or to save money to start a part-time business. If you want to save $3,000 over the course of a year, you can break that goal up into manageable amounts like $250 a month, $58 a week, or $8.22 a day. A worthy long-term goal would be to consistently fund a retirement account or perhaps to save for a child’s education. I’ve created three action steps in this post to help you create and accomplish your unique financial goals.
Action Step #1: Create a Net Worth Statement
The first step is to assess your current financial situation by creating a net worth statement. You can calculate it on paper, in a software program, or in a computer spreadsheet. Figuring your net worth isn’t difficult; it just takes a little time to gather and accurately record all your information. You simply add up all your assets and subtract out all your liabilities. The resulting number (whether it’s positive or negative) is your net worth.
Assets are things you own that have value, such as real estate, cars, jewelry, electronics, cash in the bank, investments, and retirement accounts.
Liabilities, on the other hand, are the remaining balances on your debts, such as mortgages, car loans, or credit cards.
Calculating your net worth should be an integral part of setting financial goals because it’s an indication of your overall financial health. When your net worth increases from one year to the next, you can pat yourself on the back. Higher net worth means you’ve increased your assets, decreased your debt, or done both. That’s an indication that you’ve become healthier--at least in a financial sense. But if your net worth is declining, one of your goals should be to eliminate or decrease your debt.
Action Step #2: Create a Budget or Spending Plan
After considering what you want to accomplish and analyzing the big picture of your finances, the second action step in goal setting is to dive into the details of how to make it happen. That’s done by creating a spending plan, also known as a budget. A spending plan is where the rubber meets the financial road, so to speak. You know the drill: you list all your sources of income and each of your expense categories. It helps to refer back to at least three months of your prior spending history, so you can see where you spent your money.
You have to add your financial goals to your spending plan. For example, if one of your goals is to contribute the maximum amount--$5,000--to an IRA, you’ll need to allocate $415 per month for that purpose in your plan. That may force you to cut back in other spending categories such as entertainment or eating out. A good rule is to spend no more than 85% of your income on living expenses, such as housing, groceries, and clothes. That leaves 15% for your savings, investments, or other special goals.
By the way, my latest audiobook, Money Girl’s 10 Steps to a Debt Free Life has entire chapters dedicated to creating a net worth statement and a spending plan. For much more information, download a copy at Audible.com, Amazon.com, or in the iTunes store. Also, at the bottom of this post are links to worksheets that can help you create your net worth statement and budget.
Action Step #3: Get Organized and Stay Organized
Once you’ve shaped your spending plan to account for all your expenses and financial goals, you’re ready for action step number three--get organized. You can manage your money and meet your goals much more efficiently when your financial house is in good order. And that doesn’t mean just being organized in January, by the way; it means being organized for good.
I strongly recommend that you do all your money management and budgeting with financial software, like Quicken. Quicken Deluxe 2010 is available for $59.99 at quicken.intuit.com and it’s well worth the price. But there are good free programs, too, like GnuCash and AceMoney. Mint.com is a free online tool for money management and budgeting that you should check out. The New Year is a great time to make the switch to a computerized system.
And if you’re not already banking and paying your bills online, I encourage you to make the electronic leap in 2010. Many banks offer a free bill pay service that allows you to pay any individual or business by check, and to pay many companies by direct electronic transfer. You can put your financial goals on auto-pilot by setting up recurring transfers and payments. Download all your banking, bill pay, and credit card transactions directly into certain software and online programs such as Quicken Online, AceMoney, and Mint.com. It just doesn’t get any easier than that!
Need Help Setting Your Financial Goals?
Here are some final thoughts about setting financial goals. If you have a spouse or life partner, create your financial goals together. If you’re single, consider getting together with a close friend or family member to talk about your money resolutions for the coming year. You could discuss your goals over dinner, during a walk, or on a long drive somewhere.
If you don’t have someone you feel comfortable talking to, or if you do but also want professional guidance, make an appointment with a certified financial planner (CFP). I suggest meeting with a fee-only advisor. That’s a type of financial advisor who never accepts commissions for products he or she recommends. If you don’t know who to call, ask for referrals from friends, co-workers, or visit napfa.org. NAPFA stands for the National Association of Personal Financial Advisors.
No matter how much money you earn, if you overspend or neglect to save and invest enough to achieve your goals, you’ll always come up short. Achieving your financial goals comes down to planning for the future, spending within your means, and practicing good financial habits. Here’s to a Happy Financial New Year everyone!
Again, this post is the first in a five-part series about taking charge of your finances in 2010. Each article in the series is about a pillar of personal finance—setting goals, saving, investing, being properly insured, and reducing your taxes. Please click on the links to head over to the other episodes.
I’m glad you’re reading. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
Here are some helpful forms from the Institute for Financial Literacy:
Net Worth Worksheet (PDF)
Net Worth Worksheet (Excel)
Budget Worksheet (PDF)
Budget Worksheet (Excel)
Budget Tracking Form (Excel)
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