Monday, August 20, 2012

How to Set Personal Finance Goals | Home Finance Help

Setting personal finance goals will always be the first step when developing a financial plan. The key to success with financial goals is patience. This page will show you a financial goal setting system, so that you can begin with the end in mind.

A personal finance goal can be as simple or as complex as you want it to be. An easy goal could be saving towards a car down payment. A more difficult goal may be saving towards early retirement.

It?s important to simplify your goals as best as possible. To make things as easy as possible, use a goal setting system known as SMART goals, which stands for:

  • Specific
  • Measurable
  • Attainable
  • Relevant
  • Time-Bound

You can develop SMART goals with numerous financial goals, but the one goal that everyone shares is saving for retirement. Unfortunately, most people don?t have a specific objective in mind for this goal. There is no telling if they are ahead of behind.

Using this SMART goal setting system will easily allow you to track your goals. Instead of having a goal of saving for retirement, your goal will look like this:

Specific- Use a Roth IRA to provide an income of $5,000 a month during retirement.

Measurable ? Estimating that you can withdraw 4% per year, and need $60,000 per year. This goal will be attained when your Roth IRA reaches $1,500,000(60,000/.04).

Attainable ? With an investment horizon of 40 years, you would use a Roth IRA calculator to determine that you must save $4,100 a year, or even more specific $341.66 a month.

Relevant- With the understanding that the S&P 500, has returned an average of 10% a year, and your investments will be more conservative as you get closer to your goal, an attainable rate of return would be 9%.

Time-Bound ? You will know if you have reached this goal if you have $1,500,000 in 40 years, or short term invested $341.66 this month.

While retirement might be a complex goal, using the SMART goal system, can make it easy.

When dealing with simpler goals like a car down payment, the same process can be used. The major difference will be in your rate of return. Instead of using 9%, you could use the interest rate on your savings account or money market fund.

Every month review your personal finance goals. You will easily know if you?ve accomplished what you needed to last month. In the example above, if there was $341.66 deposited into a Roth IRA, then the goal was accomplished. It?s as simple as that.

For long-term financial goals, it?s important to have patience. Having a long-term horizon means you get to ride the ups and downs of the market. There are going to be months where you think you could reach your goal a decade sooner or a decade later. Have trust that the market will remain productive, and you will be rewarded.

Source: http://www.thehumblemumble.com/how-to-set-personal-finance-goals/

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