How to Set Financial Goals
For a long time I was just making payments on my debt and most of the time even more than the minimum payment without any specific goals. I began contributing to my retirement as soon as I got a job after college, but I wasn’t getting anywhere financially. I wasted three years of a solid steady (below average for a college graduate) income, while living well below my means, and had very little to show for it. Partially due to some bad luck, partially due to a lack of knowledge, but mostly due to not having clear and direct goals. I thought coming out of college, paying off almost $2,000 in credit card debt in three months from my barely-more-than-minimum-wage summer job, landing a “big-girl job” that September and paying double on my student loan payments while contributing 2% of my salary to my retirement plan was just the best anyone has ever done in the history of money. And while that is better than most people can say they did, I could have done so much better if I had only set some goals to push me to do my best.
So how do you set goals? I personally like the SMART method. Goals should be specific, measurable, attainable, realistic and timely. This can be simplified because it is kind of redundant. What it comes down to is to plan to be at a specific point in a realistic time frame. Sounds pretty simple right?
For an example, I will use our goal of buying a house. Shortly after we got married in the fall of 2014, we had our “a-ha moment” about our debt and all of this “extra money” in our budget that we found to put towards our dream wedding. If we could figure out about $20,000 over the course of a year for only one day of our lives, why could we not do the same for our future? So we began saving and making huge payments to our debt and within a year I paid off about $4,000 in credit card debt and the remaining $4,000 of my student loans. All while saving for our down payment. Most single family homes in this area sell for about $200,000.
Buy our forever home and sell his house.
Combine our savings with his equity for 20% down on a house listed at about $200,000. So $40,000.
At the time we were able to comfortably save about $800 per month after making extra payments to our debt, with estimated equity of $20,000. It would take 25 months to save the remaining $20,000 at that rate.
We got pre-approved for more than $200,000 and figured out an estimate of what we needed to save to get to 20% down after applying his equity.
Our plan was to move after we had been married for two and a half years (spring 2017). Thus, giving us a chance to pay down debt while saving for the 20% down payment. But then life and the housing market happened.
So did we do it? Yes and no. See how my husband talked me into moving a year and $20,000 sooner, we moved after being married a year and a half and with equity similar to our estimate and a very small portion of our down payment was cash, my student loans and credit cards were paid off but no significant progress was made on any other debt. In fact, I added a car payment. We did not put down the full 20%, which terrified me until I looked at the numbers. We are actually saving money this way. So in some cases it also helps to set goals that are somewhat flexible. Either in time, as our debts will now be paid in full later than planned; or in the specifications, our monthly payment would have actually been higher if we had waited until we met our initial goal to buy a house. As new information comes in you may need to re-evaluate your goals and timelines. We have a few more SMART goals in place that involve snowballing our payments to paying off our debts faster. Stay tuned to see our progress.