When you think about financial goals, you tend to think about the home of your dreams or early retirement and rightly so, because the fulfillment of your financial dreams is usually one of the main reasons why you go to work in the first place.
In order to be able to fulfill your dreams, however, you must complete some steps along the way. These steps are often easy to forget, but they are vitally important for those of us who are striving for our own version of financial success.
All of these steps or financial fundamentals are key ingredients for your personal financial success and the realization of your financial dreams. The prioritization of these steps, however, will vary depending on your individual situation and the main factors that comprise it, including, but not limited to the size of your family, the level of debt you are carrying, and the extent of your financial goals.
1. Understand Your Finances
First and foremost, make it your personal responsibility to thoroughly understand your own financial picture.
You should know exactly what your income is and how it fluctuates, if applicable. You should know what your obligations are and when they are due. You should also be able to readily answer questions such as: When are you due for a raise? When was the last time you balanced your checkbook? What are the interest rates that you pay on your loans? What is your income tax liability and are your withholding amounts going to fully cover it? What do you save out of each paycheck and where do you save it? What do you earn on your savings? What are your assets?
The bottom line is to know your own finances and what it takes to manage them inside and out.
2. Minimize Your Debt
When you minimize your debt, you maximize the options available to you.
Financial options are always positive because you can always exercise your power to choose to your advantage. If all of your income is already spoken for because your obligations equal or are close to equaling the amount of money that you are bringing in then you really don’t have many choices other than to try to do the best that you can to cover your debt.
Minimizing debt does not necessarily mean eliminating it. Debates continue about whether or not there is such a thing as categories of debt, such as bad debt and good debt. However you feel about debt, reality usually dictates that you incur somewhere between some and a lot of it during your lifetime. If you limit your debt to that which is essentially necessary, such as a mortgage loan, you will not only preserve options for yourself, you will be utilizing sound financial management practices to get yourself to and keep yourself in that position. It is important to note that certain debt, such as mortgage debt, can provide you with benefits such as a reduction in your tax liability. So, it isn’t so important to concentrate on being debt free as it is to concentrate on effectively managing the needs of your personal financial situation to put yourself in the best position to achieve your financial goals.
3. Set Clearly Defined, Personal Financial Goals
Mastering these fundamentals and exercising self-discipline will get you absolutely nowhere if you don’t clearly define the importance of why you are taking these actions and what you hope to achieve.
Setting a goal or goals that are meaningful to you will serve the dual benefit of making your effort worthwhile and helping you to make your dreams become a reality. Your goals must be personal to you in order for them to have meaning and provide you with the motivation you will need to set your course toward achieving them. Each goal is going to require its own set of action steps. If your personal goal is to send your child to college, you will typically need to start the associated planning and saving many years in advance of his or her anticipated high school graduation date. If your personal goal is to own your own mansion someday, you will usually need to start investing in real estate early on with that very specific purpose in mind. In this case, you will want to perhaps be a little more focused on what investment is going to earn you the greatest return as opposed to what home might be the best for your current family needs.
4. Develop Checkpoints and Measurements
The work does not end once you’ve set your goals. In fact, you could say that the real work is just beginning.
No matter how attainable your financial goals are, you will never achieve them without putting a system in place that helps you to measure whether you are making the needed progress and what, if any, other steps you will need to take to stay on track. The longer-range goal you set, the more measurements and checkpoints you will need to get there. An example of a useful measurement is to set a dollar amount or percentage gain you need annually to achieve a savings goal, such as college tuition. If your goal is to pay off a loan, you can set a target balance owed for the end of each month or year until you have paid it off.
5. Make Your Financial Dream a Reality
If you develop a thorough understanding of your financial picture, focus on the fundamentals of your own financial management needs, set realistic and attainable goals that are meaningful to you, and check your progress along the way; the only thing left for you to do is to go out and make your dreams a reality, MAKE THEM HAPPEN!
If you commit to prioritizing your personal finances in this way, there is actually no reason why you can’t achieve your financial goals.
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker.