Financial Goals: How to Achieve Financial Freedom

Many people have financial stability as a top priority, but without a strategy, it can be challenging. Setting short, medium, and long term financial goals is an important first step on the path to financial security. Every year, you should examine your financial goals and make any necessary revisions. The steps below will help you come up with a plan to get your finances in order now and in the future.

Short Term Financial Goals

Setting short term financial goals will give you the foundation and confidence you need to reach the more ambitious, time consuming ones. These first steps are relatively easy to achieve in as little as one year: Create a budget and stick to it. Create an emergency fund. Pay off the credit card debt that’s holding you back.

Establish a Budget

A simple way to keep track of your expenses is to use a free budgeting program like Mint. It will consolidate information from all of your accounts in one place, allowing you to categorize each expense. You can also create a budget the old fashioned way, by reviewing your bank statements and bills for the past few months and categorizing each expense on a spreadsheet or on paper.

“A goal without a plan is just a wish.”

Antoine de Saint Exupéry

You may find that ordering from Seamless every day you work from home (or spending that amount on lunches with co workers if you go back to the office) is costing you $315 a month, at $15 a meal for 21 workdays. You may find that you spend another $100 every weekend on meals with your significant other. When you look at how you spend your money and are guided by that information, you can make better decisions about where you want your money to go in the future.

Does the pleasure and convenience of eating out pay off for you at $315 a month? If so, great, as long as you can afford it. If not, you’ve just discovered an easy way to save money each month. You can look for ways to spend less when you dine out, substitute some restaurant or takeout meals for home cooked meals, or do a combination of both.

Create an Emergency Fund

An emergency fund is money set aside specifically to meet unforeseen expenses. For starters, $500 to $1,000 is a good target. When you reach that goal, you’ll want to expand it so that your emergency fund can cover larger financial difficulties, such as unemployment. If you didn’t have an emergency fund before the COVID 19 pandemic, you probably wish you had. And if you did, you may have depleted it and need to replenish it.

While you probably have other savings goals as well, such as saving for retirement, building an emergency fund should be a top priority. It’s the savings account that creates the financial stability you need to achieve your other financial goals.

Paying off Credit Cards

Experts disagree on whether to pay off credit card debt first or create an emergency fund. Some say you should create an emergency fund even if you still have credit card debt because, without one, any unexpected expense will cause you to go further into debt. Others advise paying off credit card debt first because the interest is so high that it makes achieving any other financial goals difficult. Choose the philosophy that makes the most sense to you, or do a little of both at the same time.

As a strategy for paying off credit card debt, Davis recommends listing all debts by interest rate, from lowest to highest, and then paying only the minimum on all but the highest rate. Use any extra funds you have to make extra payments on the card with the highest interest rate.The method Davis describes is called debt avalanche.

Another method to consider is the debt snowball. With the snowball method, you pay off your debts in order from smallest to largest, regardless of the interest rate. The idea is that the sense of accomplishment you get from paying off the smallest debt gives you the momentum you need to tackle the next smallest debt, and so on until you are debt free.

Gallegos states that debt negotiation or debt settlement is an option for those who have $10,000 or more in unsecured debt (such as credit card debt) and cannot meet the minimum required payments. Companies offering these services are regulated by the Federal Trade Commission and work on behalf of the consumer to reduce the debt by up to 50% in exchange for a fee, usually a percentage of the total debt or a percentage of the debt reduction amount, which the consumer must only pay after a successful negotiation.

Consumers can get out of debt within two to four years this way, says Gallegos. The drawbacks are that debt settlement can hurt credit scores and creditors can take legal action against consumers for unpaid bills.

Bankruptcy should be a last resort, because it destroys your credit rating for up to 10 years.

Medium Term Financial Objectives

When you’ve created a budget, established an emergency fund, and paid off credit card debt, or at least made a dent in those three short term financial goals, it’s time to start working on your medium term financial goals. These goals will create a bridge between your short term and long term financial goals.

Take Out a Life and Disability Insurance Policy

Do you have a spouse or children who depend on your income? If so, you need life insurance to cover them in the event of your untimely death. Term life insurance is the least complicated and least expensive type of life insurance, and it will meet most people’s insurance needs. An insurance broker can help you find the best price on a policy. Most term life insurance requires medical underwriting, and unless you are seriously ill, you are likely to find at least one company that will offer you a policy.

Gallegos also says you should have disability insurance to protect your income while you work. “Most companies provide this coverage,” he says. “If they don’t, individuals can obtain it on their own until retirement age.”

Disability insurance will replace a portion of your income if you become seriously ill or injured to the point of being unable to work. It can provide you with a benefit greater than your Social Security disability income, allowing you (and your family, if you have one) to live more comfortably than you would if you lost your earning capacity. There will be a waiting period between the time you become unable to work and the time insurance benefits begin to be paid, another reason why it is so important to have an emergency fund.

Repaying Student Loans

Student loans are a major burden on many people’s monthly budgets. Reducing or eliminating those payments can free up money that will make it easier for you to save for retirement and meet other financial goals.

One strategy that can help you pay off your student loans is to refinance into a new loan with a lower interest rate. But be careful: if you refinance federal student loans with a private lender, you may lose some of the benefits that come with federal student loans, such as income based repayment, deferment, and forbearance, which can help you if you fall on hard times.

If you have multiple student loans and will not benefit from consolidating or refinancing them, the debt avalanche or debt snowball methods mentioned above can help you pay them off faster.

Think About Your Dreams

Medium term financial goals may also include goals such as buying a first home or, later, a vacation home. You may already own a home and want to renovate it or start saving to buy a larger one. College for your children or grandchildren, or even saving for when you have children, are other examples of medium term goals.

Once you have set one or more of these financial goals, start calculating how much you need to save to make a dent in achieving them. Visualizing the kind of future you want is the first step to achieving it.

Long Term Financial Objectives

The biggest long term financial goal for most people is to save enough to retire. The general rule of thumb is that you should save 10% to 15% of each paycheck in a tax advantaged retirement account, such as a 401(k) or 403(b), if you have access to one, or a traditional IRA or Roth IRA. But to make sure you save enough, you should calculate how much you’ll actually need to retire.

Calculate Your Retirement Needs

Many people regard retirement as a top financial priority, so it’s critical to estimate your retirement requirements to ensure you have enough money saved to live comfortably in retirement. Consider your present income, expenses, and lifestyle, as well as any foreseeable future changes, when calculating your retirement needs.

It’s critical to take your current income and expenses into account when determining your retirement needs. You can use this to calculate how much money you’ll need to put aside in order to maintain your current standard of living once you retire. You should also account for any potential future changes, such as an increase in expenses due to inflation or a loss in income due to a change in employment.

It’s also crucial to think about the kind of retirement you want: do you want to travel, own a second house, or engage in other pastimes? It is crucial to take these activities into account when calculating your retirement needs because they will demand more funding. You should also think about what kind of retirement account you’ll utilize to save for retirement. Before making a choice, it is crucial to comprehend the distinctions between various accounts’ tax effects.

Last but not least, it’s critical to regularly assess your retirement needs to make sure you’re on track to reach your objectives. It is important to change your savings as your income, expenses, and retirement needs change. You can make sure you have enough money saved to live comfortably in retirement by taking the time to analyze your retirement needs.

Increasing Retirement Savings

Financial plans should include retirement savings. Starting early allows your retirement savings to increase. Increased 401(k) or IRA contributions, automated transfers from your checking account to your retirement account, and business matching contributions are all strategies to enhance retirement savings.

Contributing more to a 401(k) or IRA can boost retirement savings. Contributing more to these accounts can boost retirement savings and tax benefits. Automatic transfers from your checking account to your retirement account can help you save more money without thinking about it. This can help you save for retirement regularly.

Finally, business matching contributions can improve retirement savings. Many firms match 401(k) payments, which can improve retirement savings. Some firms offer Roth IRAs, another wonderful retirement savings option.

Any financial plan should include increasing retirement savings. Increase your 401(k) or IRA contributions, set up automatic transfers from your checking account to your retirement account, and take advantage of workplace matching contributions to save for retirement.

Wrap Up

You probably won’t make perfect, linear progress toward achieving any of your financial goals, but the important thing is to be consistent. If one month you have to make an unexpected car repair or pay a medical bill and you can’t contribute to your emergency fund, but have to take money out of it, don’t beat yourself up; that’s what the fund is for. Get back on track as soon as possible.

The same is true if you lose your job or become ill. You’ll have to create a new plan to get through that difficult period, and you may not be able to pay off debts or save for retirement during that time, but you’ll be able to pick up your original plan or perhaps a revised version when you come out the other side.

That’s the beauty of annual financial planning: You can review and update your financial goals and monitor your progress toward them through life’s ups and downs. In the process, you’ll discover that both the little things you do on a daily and monthly basis and the big things you do each year and over the decades will help you reach your financial goals.

FAQs about Financial Goals