Saving money matters when it comes to leading a richer financial life. Having money in the bank can make it easier to weather emergencies or to realize your dream of owning a home. Setting clear money goals is the first step in making savings a regular part of your financial routine.
Why You Need Financial Goals
Setting financial goals allows you to put hopes and dreams into action. It starts with choosing a goal, then developing a plan for achieving it. For example, the Consumer Financial Protection Bureau advises using the SMART goal-setting system. It requires your financial goals be:
Outlining money goals this way can give you the direction and the motivation you need to follow through on them. Here’s what a SMART goal might look like for an emergency fund:
|Specific||What are you saving for?||An emergency fund|
|Measurable||How much do you want to save?||$3,000|
|Attainable||Is this a reachable goal?||It is if I earn more, spend less, and plan.|
|Relevant||Why is this important to you?||I need to be prepared for surprise expenses.|
|Timebound||When do you want to reach the goal?||In 12 months|
Action To Take: Set Two Savings Goals for This Year
When setting financial goals, less can be more. Set too many goals and you may feel completely overwhelmed. That could lead you to give up before you begin.
If you're not sure what to focus on with your money goals, there's a simple way to approach it. Choose one financial goal you can achieve in the short term, and one money goal to focus on for the long term.
Short-Term Financial Goal: Build Emergency Savings
An emergency fund can be a lifesaver when you have an unexpected expense. According to Federal Reserve data, 30% of Americans wouldn't be able to cover a $400 expense using cash or its equivalent.
If you don't have a rainy-day fund or you've depleted yours, saving for emergencies should take priority over other savings goals in the short term. First, determine how much you need and want to save.
For example, you may want to save three- to six-months' worth of expenses. Or you may choose to save a set dollar amount. You could then break that goal down to determine how much you need to save each month to achieve it. So if you want to save $3,000 for emergencies in the next year, you'd need to aim for $250 in savings each month.
Long-Term Financial Goal: Think Big
When setting your second money goal, consider what you want to accomplish in the next five, 10, or even 20 years. For example, you might want to buy a home. So saving cash for a down payment and closing costs could be your big money goal. Or you may want to stash away money for retirement instead.
When setting longer-term financial goals, start with a set dollar amount. Next, work backward to figure out what you need to save monthly or yearly. For example, if you want to save $20,000 toward a home over the next four years, you'd need to save $5,000 each year. That breaks down to $416 and change each month (not counting interest or investment gains).
As you set your short- and long-term financial goals, consider where to keep your money. A high-yield savings account, for example, could help you earn more interest on your emergency fund compared to a regular savings account. Opening a CD or creating a CD ladder might be preferable when saving for longer-term goals.
Next Steps and More Resources
Setting money goals is an important link in the chain when working toward financial wellness. Once you've set some broad goals, you can work on fine-tuning them. For example, you next can turn your focus to building short-term savings for the fun things in life, as well as the occasional curve ball.
Keep reading to learn more about the benefits of saving:
- We’ve given you a couple of reasons to start saving, and here are some more Reasons To Save Your Money and get motivated.
- You know you should have an emergency fund, in a general sense. Make the knowing more real with these specific Reasons You Need an Emergency Fund.
- After you’ve located all the coins in the couch it’s time to look for other places to find money to stash away: 10 Money-Saving Hacks To Reach Your Financial Goals.
Consumer Financial Protection Bureau. "Setting a SMART Saving Goal."
Federal Reserve. "Update on the Economic Well-Being of U.S. Households: July 2020 Results."