What are Financial Goals? - Meaning, Types & How To Plan

What are Financial Goals?

A financial goal is a specific, tangible goal that provides your money with a purpose. It encourages an irrational desire to save towards the future into a concrete plan of action. A financial goal serves as the guide to all your financial plans, changing the course from earn and spend to save and invest.

After understanding what are financial goals, you need to know that every solid financial goal is built from three core pieces. They answer the most important questions:

• The Objective (The “Why”): What is the specific reason for saving this money? It might be building an emergency fund. Maybe it is buying a car or paying for a child’s education.
• The Target Amount (The “How Much”): What is the exact amount of money needed for the objective? This number is your finish line.
• The Time Horizon (The “By When”): What is the concrete timeframe in which you want to accomplish your goals? This will shape the carpentry of your investment and the times and tenses involved in savings plans.

Types of Financial Goals

Now we know what are financial goals, further let us explore its types. Depending on the duration of the goals, financial goals can be categorized into three types:

Short-Term Goals

A short term financial goal is an objective that can be achieved in a few months. They are usually accomplished in the near future. For example, saving for a vacation, starting an emergency fund, purchasing a gadget, etc. Some short-term financial goals are small milestones that help you to reach long-term goals.

Mid-Term Goals

Mid-term goals are intermediate goals as they take a longer time than short-term goals but a shorter period than long-term goals. It may take from a few months to a few years to achieve mid-term goals. Saving for your marriage, saving for a new house, renovating your current home, starting a new business, etc., are categorized as mid-term goals.

Long-Term Goals

Long term financial goals are the financial objectives in the distant future and usually take ten years or more to accomplish. Some common long-term goals are a retirement fund, saving money for children’s education or marriage, paying off a mortgage, etc.

Examples of Financial Goals

Your goals are your own. They change based on your life stage and your ambitions. The following are some of the most critical examples and form the bedrock of any solid financial plan:

Building an Emergency Fund

This is your financial safety net. A high-priority, short-term goal. Your objective is to save 3-6 months of essential living expenses. This fund covers unexpected events like a medical emergency or a job loss. It protects your long-term investments from being derailed and keeps you out of debt.

Saving for a Child’s Education

This long-term goal for parents involves systematic investing to build a large fund. Education costs are always rising. Success here requires disciplined investments that beat inflation over many years. This is how you prepare for a key stage of life.

Planning for Retirement

This is the ultimate long-term objective for most people. The task is to create a corpus large enough to generate income after you stop working. Financial independence in retirement is the prize. It demands decades of consistent saving and fully leveraging the power of compounding.

Paying Off Debt

This strategic goal clears your outstanding liabilities. You should focus especially on high-interest debt like credit card balances or personal loans. Becoming debt-free liberates your cash flow. It reduces financial risk. You can then allocate more of your money toward building real wealth.

Saving for a Vacation

It is a short-term lifestyle goal. You set aside specific funds for travel. Planning for the expense this way means you can enjoy the trip without financial stress. There is no need for unnecessary debt. This makes it a very tangible and motivating savings target.

How to Plan Financial Goals?

Now that you have understood financial goals meaning and the objectives of financial planning, you must be wondering how to plan financial goals. You can follow these simple steps for financial goal setting for yourself:

Assessment of Current Financial Situation

The financial planning process begins with a comprehensive assessment of the current financial situation. This includes evaluating income, expenses, assets, and liabilities. Understanding the present financial landscape is crucial for setting realistic and achievable goals.

Goal Setting

Once the current financial situation is clear, the next step is setting specific and measurable financial goals. These goals should be aligned with individual priorities, whether they be short-term, medium-term, or long-term in nature.

Development of a Financial Plan

With goals in place, a detailed financial plan is crafted. This plan outlines the strategies and actions required to achieve the set objectives. It may include budgeting, investment plans, debt reduction strategies, and risk management techniques.

Implementation and Monitoring

Executing the financial plan is a continuous process. Regular monitoring and adjustments are essential to accommodate changes in personal circumstances, market conditions, or economic factors. Flexibility ensures the plan remains dynamic and responsive to evolving needs.

How to Prioritize Your Financial Goals for Investment?

After you have established your financial goals, the next most important thing to do is to prioritize it. This process establishes where to direct your capital to have the greatest impact and creates a clear and clean roadmap of your investment plan.

Establish Your Financial Foundation First

Evaluate your present financial wellness and then move toward future goals. This involves a clear understanding about your income, expenses, and any liability that may already be there. The first thing one should do is to get rid of high-interest debt and create a fully funded emergency fund that covers 3-6 months of expenses.

Categorize Goals by Urgency and Importance

Using the “Urgency-Importance Matrix,” categorize your goals. This will aid in making a distinction between the non-negotiable needs, such as retirement planning and the education of your child, and aspirational needs, like a luxury car or an international vacation. This framework helps you have direct clarification on what goals will require urgent funding and which ones can be left for a future plan.

Align Each Goal with a Time Horizon

Assign a timeline of investment to each prioritized goal. Here is how to do it:

• Short-Term Goals (1-3 years): Low-risk investments are needed here; these should be in the form of liquid investments with no risk.
• Medium-Term Objectives (3-10 years): It should have a balanced portfolio of equity and debt.
• Long-Term Goals (10+ years): This will permit a larger allocation to growth investments such as equities to tap into the power of compounding.

Review and Realign Periodically

The list of priorities is not a single-time event; it is an on-going process. You must re-evaluate your plan whenever there is any change of event or at least once every year. This is to make sure that the levels of your investment strategy always stay in absolute synchronization with your priorities and financial circumstances.

To Wrap Up

Planning financial goals is a pivotal pillar in changing times. Financial goals can be defined, worked upon, and accomplished with a customized plan. You can consider factors like income, budget, and targets and design a unique plan for yourself. So, after understanding what are financial goals, start planning financial goals today to have a better tomorrow!

FAQs on Financial Goals