Short term financial goals, why do they matter? Isn’t it simpler to just jump to massive goals? Not if you want to create the conditions that would eventually bring you to financial freedom.
And let me tell you…
Goals are more important than money!
I dare say that it’s impossible to earn serious money – the kind that will let you escape to early retirement or something similarly epic – without a clear long term financial goal.
If you’re the type to give up halfway and declare to the world that you don’t need this crap, your goal will give you your “why”. And this “why” will give you the motivation to push forward when the going gets rough.
Your goal will remind you why you do need this crap.
Okay, so why short term goals?
If you’ve ever made a cross-country trip, you know that you can’t make the entire trip without hitting a few stops. You’ll need stopovers if you want to make it to your destination without totaling your car.
That’s basically what short-term goals are. They’re the stopovers that let you know you’re going in the right direction. And you need them in managing your personal finance because saving $1 million, for example, seems crazy if you’ve got no idea what you’re doing.
And short term financial goals are ideally achievable in one year or less. So they’re pretty useful for:
1 – Keeping you focused. Think of it as building a LEGO Deathstar. How the heck did they make a round-shaped object out of blocks, anyway? They break it down into steps, so you don’t have a meltdown trying to figure it out on your own.
2 – Gaining momentum. You know why? Because science. It’s harder to stop something with momentum. Ask any parent with a sugar-crazed toddler. A series of small wins will make winning feel like second nature, and keep you winning all the way to that big goal.
Keep your short-term financial goals SMART!
And by SMART, I mean:
- Specific. They should be clear so they’re easier to achieve.
- Measurable. Especially because we’re talking about financial goals, they should be quantifiable.
- Actionable. You should be able to do something about it.
- Realistic. So cross out making a billion dollars in a year. It’s probably not going to happen.
- Time-bound. You don’t want to be too old before you get there. Give yourself a deadline.
Don’t overthink it. It’s just the difference between “Get rich” and “Earn $1 million in 5 years”.
Short term financial goals might include:
1 – Pay off your high-interest debts
Why it’s important: It will only get worse the longer you wait, so you might as well get it over with.
If you’re buried under a ton of credit card debt and other high-interest debt, you should pay them off ASAP.
Don’t even think about investing tons of money somewhere else before you get this done. Unless you’re about to get into some shady business deals, there’s no way you’ll come out on top.
Here’s what I mean:
You have a $10,000 debt that compounds at 17% per year. So in one year, you owe $11,700.
Instead of clearing your debt, you decided to invest that money in index funds that grow an average of 9% a year. So after a year, you have $10,900.
We’ve all taken basic math. Using those numbers, investing instead of paying your debt costs $800. And the loss will just keep getting bigger, pulling you further away from financial independence.
Sure, this is an oversimplification of the math. But you still should understand this: HIGH-INTEREST DEBT IS BAD.
And that’s not the only way you’re losing money. A good debt-to-credit ratio is usually associated with a better credit score. So when you do need to borrow money, it won’t cost you as much.
If you’ve maxed out your credit cards because of a Nigerian prince who promised you millions, accomplishing this goal won’t be as overwhelming if you focus on one credit card at a time.
2 – Invest in yourself by learning
Why it’s important: Mistakes are costly. Just ask anyone who lost money because they blindly jumped into a hype.
“WTF, man??? I thought I shouldn’t invest yet??”
Believe me, I get that you might be extra confused that’s why I also put in all those extra question marks. But investing in yourself doesn’t need to be super pricey.
Plus, short term financial goals are all about setting you up for success. You need to know how to make money to… you know, make money.
Does this mean you should finally take those guitar lessons you wanted to take as a kid? Maybe not yet.
You should focus on skills that can help you improve your personal finance right away like:
SKILLSET#1. Job-related stuff. This can help you get a promotion or a raise. And if you can sweet-talk your boss into paying for it, even better! If you spend $3K on a professional certification that would get you a $6K raise – you’ve just doubled your investment in under a year!
SKILLSET#2. Productivity stuff. This will help you free up more time to work or earn more money. For example, if you get a $500 side gig that you can complete in three hours instead of five, that increases your hourly earnings from $100 to $167.
SKILLSET#3. Money earning stuff. If you’re going to invest without knowing what you’re doing, you might as well give it away.
My two favorite recommendations for this are:
Blinkist – the book summary app that makes me smarter in fifteen minutes per day (read my Blinkist review) and
Personal Capital – the free personal finance app that keeps all my saving and investing information together to keep me motivated. (Read my Personal Capital review.)
This doesn’t even have to cost you anything. You can learn more about achieving your long term financial goals for free from an awesome guy who’s made it happen for himself. Me, I’m that awesome guy. 🙂
3 – Create your roadmap to financial independence
Why it’s important: This will help you craft your own super-specific short term financial goals and keep you motivated!
I’m going to be straight with you. “Roadmap” is just a fancier way of saying “plan.” So pretty much like me telling my kid that broccolis are just little trees.
But as much as you may want to avoid this, you kinda have to. No way you’re going to be able to see your progress if you don’t know what to track in the first place.
Remember how we talked about how every goal should be SMART? This would apply here too.
I like my plans as a series of graphs. But if you think something else would work for you, go for it!
4 – Set up an emergency fund
Why it’s important: If something goes wrong, you don’t want to end up in the streets. An emergency fund will give you a sort of financial cushion just in case.
To be clear, getting a massage because your muscles are sore after five minutes of working out doesn’t constitute an emergency. You can only use this if you literally have zero dollars coming in or if it’s a legitimate emergency.
So it needs to be based on what you usually spend per month. And I recommend this to be six months’ worth of your expenses. For example:
You need $2,000/month minimum to survive. So multiplied by six, your emergency fund should have at least $12,000.
Personally, I like mine in bonds because I know that inflation will kick me in the donkey in the long haul. Plus, it makes it a little harder for me to access. You can have yours all in a savings account or a mix of both.
If you don’t have enough for the emergency fund yet, that’s fine! But you should still start on it. Just keep track of your spending so you can adjust the goal accordingly.
5 – Improve your credit score
Why it’s important: Loans can be good. And lower-rate loans are even better! Your credit score determines whether you qualify for certain loans and the rate you’ll get for them.
Compounding interest on loans is hot garbage juice in summer, but you can at least minimize its impact on your long term financial goals. Don’t believe how much of an impact your score has? Try out this loan savings calculator.
For a $500,000 30-year fixed loan, you’ll pay $373,834 in interest if your score falls around 620-639. But if it’s in the 760-850 range, you’ll only pay $215,906 in interest – that’s $150k+ less!
You shouldn’t expect some miracle jump in your score, but keep in mind that every point matters. Paying your debt isn’t the only way to improve your credit score. Your FICO score is a reflection of your payment history, length of credit history, debt-to-credit ratio, average age of loans, and types of credit used.
And to cover your bases, you can:
- Check your credit report and dispute any errors.
- Pay your debts on time.
- Request a higher credit limit on your credit card. (But don’t use it!)
- Keep your credit cards open even if you don’t use them much.
- Ask someone with great credit to let you become an authorized user for their cards. (You don’t have to use the card or know the account number)
- Keep your debt-to-credit ratio at 30% or below.
6 – Maximize tax savings through tax-sheltered accounts
Why it’s important: The less in tax you pay, the more that’s left for you!
Unless you’re a weirdo who dreams of crunching numbers instead of having your teeth fall out like a normal person, you probably find tax stuff boring. So let’s talk about the potential savings instead.
Short term financial goals might include stuff that will still take you months to accomplish. But this one is actually very easy. You’re just forcing yourself to save money:
- If your employer matches your 401k, you earn the entire employer match. So if you put in $2,000 and they top up 50% of that, you get $1,000 in your 401k.
- If you’re in the 25% tax rate, you save that much. So for every $1,000 you put there, you’re saving $250 in taxes.
7 – Create passive income
Why it’s important: Who doesn’t like money for doing squat? The quicker you make money, the sooner you’ll achieve financial independence.
You can work long hours, but the money doesn’t matter if you’re sick or six feet under.
If you’re not filthy rich, don’t expect to earn enough for your needs. But you should at least get started even with just $1,000.
And the easiest way to do this is through index funds because they’re a no-brainer. You don’t have to be some Wall Street hotshot and it requires virtually no work. Just open an account online and invest.
The best thing about starting early is that even if you lose money, it won’t affect your personal finance at all. Better to lose $1,000 than $100,000 later, right?
I’m not saying that you should actively lose money. But if you want to eventually quit your job and be a full-time rich dude, you have to be comfortable with creating passive income.
8 – Hit a monthly saving target
Why it’s important: You don’t want to “accidentally” spend all your money on Funko Pops. A budget helps you avoid that.
If you’ve been following me for a while, you know that I have no love for budgeting. But I only say that because people have NO IDEA how to budget.
You’re not the IRS! You’re not going to get audited for that gallon of milk, so don’t create a line-item budget. What if its price goes up? You’d get crazy comparing prices month after month.
So why not base your budget on just a saving goal? Look at your usual spending and make a monthly savings target.
For example, last month you had $5000 left over. You saved that then. Save it again. Do it for a whole year then when it feels easy step it up to a larger value.
Constant savings and accelerated saving rates are a recipe for success if I’ve ever seen one.
The beauty here is if you do great job not spending and hit your goals. You can have some guilt free spending money.
9 – Spend only the bare minimum you need to survive
Why it’s important: If you don’t spend as much, it will be easier for you to retire early. Plus, you can use the extra cash to invest.
But by the bare minimum, I don’t mean eating once a day and walking 20 miles every day for work. That’s how you end up in a hospital, which can be pretty expensive even if you have great insurance.
Just give up any non-necessity. That’s it.
So if you’re earning $40,000 after taxes and you spend $2,000 per month, you save $16,000/year. It gets better when you get a raise. For example, if you get a $5,000 raise, you increase your savings by that much.
Do I recommend that you live your life like this forever? Not unless you enjoy torturing yourself. But living super frugal for a period can really open your eyes to what’s possible.
10 – Invest in crowdfunded real estate
Why it’s important: It’s financially predictable. And predictable is always good.
If you don’t have enough for a downpayment, the better alternative is crowdfunded real estate. Here, you become a shareholder of a property and get part of the profits.
Read more about:
Crowdfunded real estate and my top eREIT picks
What’s great about this is you earn without doing any of the work. You don’t have to think about the tenant calling you about anything or finding a tenant in the first place. But before investing, find out the fees involved because these can eat away your income.
My real estate investments return an average of 11% a year. Since they’re legally mandated to pay 90% of the taxable income, let’s assume that you’ll earn 10%.
So if you invest $10,000, you’ll get $1,000. Not bad for doing nothing.
WARNING!! Achieving short term financial goals might include extra happiness.
That’s what this study at Wharton said. And they had 33,000 participants, so it’s pretty legit.
People with more money have more control over their life. They can retire early, work anywhere, and ditch off-brand Fruit Loops for the real thing.
So if you’re finding happiness, maybe you need to cancel that soul-searching vacation because all you really need to do is earn more money.