We have all been guilty at some point in our lives of crossing the threshold of our budget without giving much thought to our actions or the ensuing circumstances, choosing instead to succumb to fleeting desires. While our needs and wants are infinite and seemingly never ending, the resources needed to satisfy such desires is unfortunately finite and scarce. The imperativeness of financial planning and formulation of effective and efficient savings goals has not been adequately emphasized.
Money touches every aspect of our lives and its management is a skill that must be honed from the early stages before it is far too late. These goals differ from person to person, usually depending on their stage in life. Teenagers might scrimp and save their pocket money to reach a financial goal that would enable them to purchase the latest shoe on the market, an aspiring student works towards paying off mountains of student debt, while those who are in their later stages of life plan for a new car or house or their retirement.
Although the terms ‘long term savings goal’ and ‘short term savings goal’ appear to be relatively self explanatory and unambiguous in nature, there are multiple aspects that are required to be taken into account and followed meticulously when aspiring to achieve financial security. Choosing to go forward with a vague idea of merely saving a portion of income earned is highly inefficient as it does not guarantee the actual long term implication of the plan.
To put it in simpler terms with the use of an example, we solemnly vow to uphold the ambitious resolutions we take every year, but how many of us have actually stuck to the plan and successfully attained the end goals?
Financial goals map out the user’s needs and wants, the monetary expenses that will be incurred on behalf of attaining such needs, the duration taken to culminate funds and achieve the end goal and finally, the steps involved in the procedure to carry out such a plan. They comprise pre–determined targets aimed at three functions namely saving, investing and expenditure.
Financial goals can be broadly classified under two different heads on the basis of their time horizons (long/short) and nature of scope (narrow/broad). The first step in realizing and differentiating between long and short term goals is to be conscious of where you stand financially before beginning the journey towards availing financial security.
Ambitions must be pursued according to their position among the list of priorities, which typically consist of a varied mixture of both the types of goals. While emergency funds and retirement plans are extremely important in the long run, ensuring that day to day requirements are met seamlessly comes before all else.
Short term financial goal
Short term financial goals are those that need to be met in the immediate future, generally within the span of a few weeks or months. Here are some of the things you can immediately do to get started on your short term goal.
Devising a budget
The establishment of a budget allows one to carefully inspect their income and expenses, create categories on areas where expenditure has been incurred, determine areas where spending is unnecessary and could be restricted as well as clearly drawing the financial limit for a specific time period.
Just like how some find it easier to recollect and complete their pending errands when listing them out, mapping out the income and expenditure sources is said to aid in the process of decision making.
Satisfying short term financial obligations
Meeting financial obligations on time is considered to be one of the most important requisites to setting financial standards. A relevant example is the wrath of credit card debts which has now reached a staggering all time high of $1 Trillion of all American citizens combined.
One might even argue that the entire system has been created to urge people into making rash decisions, trapping them in piles of debt before they even know it. When expenditure overtakes the level of income earned, that is when debt rears its ugly head.
Expenditure must be maintained below the level of income or at the very least, equal in value.
Establishment of an emergency fund
Contingent and future events can’t be predicted, giving rise to emergencies that are often uncalled for. There is nothing worse than wringing one’s empty hands, desperately seeking financial resources during times of grave needs.
While it may be difficult, not to mention the huge dent it will leave on one’s disposable income, a portion must be stowed away for rainy days. Starting with a small percentage and gradually increasing it upon successful execution, so as to cover larger financial contingencies, is a good place to start from.
Long term financial goal
Long term financial goals are those that require years, sometimes even decades, to reach. Although the time period available to fulfil these goals are comparatively much longer than short term financial goals, they entail a higher degree of attention to monitor the progress and generally involve large sums of money.
The goals that fall between the short and long term goals are defined as Mid – Term financial goals which extend from a period three to five years. They are often confused with long term goals which, on the other hand, relate to goals that span over a period beyond five years. Examples of mid – term financial goals are securing the down payment upon the purchase of a house or settling loans in their full capacity.
Retirement planning
There are certain prerequisites to be considered before mapping out the steps required to be performed for procurement of the financial cushion that will ensure a steady flow of income even after one leaves the workforce behind.
Composition of the time horizon, which is the difference between one’s current age and the age at which one desires to retire, forms the foundation of an effective retirement strategy.
This time period must span long enough so as to ensure ample time needed to meet retirement goals. In other words, the longer you wait, the greater the stress imposed on your financial resources and lesser the risk appetite of investment portfolios.
Reaching a figure that effectively captures an approximate value for post retirement expenditure and nature of spending habits. Forecasting estimations of total annual expenditure to be incurred during the retirement phase as well as allocating a substantial portion of funds towards health care has the potential to provide an approximate value of how much one would need at the time of retirement.
There exists a common misconception that after retirement, one wouldn’t have much to spend on. This notion is unrealistic as a vast majority of the retired population tend to splurge and travel, now that they are deprived of work that had previously kept them occupied.
The plan should not be rigidly constrained and must be flexible enough to allow regular changes that could potentially occur due to various economic conditions, changes in personal priorities and retirement goals and other such unpredictable events.
Final thoughts
While the above mentioned strategies for the development of financial goals for both long and short term periods will certainly assist the user in staying on the right track to meet the goals, they are not sure-fire ways to evade financial distress altogether for such events to occur unexpectedly.
Your plan may be subject to flaws here and there, it doesn’t need to achieve perfection as long as consistency is never compromised. Encountering hurdles along the way are natural and however tempting it might appear to dismiss your pre–conceived goals in such turbulent times, a more appropriate method to deal with the situation would be to modify and alter the plan to suit the new changes in your life.
The occasional indulgence and loosening of the purse strings is nothing of major concern as long as it doesn’t create a dent in the available resources. Debt has come to become a common feature among the other characteristics associated with leading an American lifestyle.
Financial literacy as well as its application in concepts of personal finance paves the path toward the finish line.