A new year is a great time to start fresh and get your financial priorities straight.
Yet, before you determine your financial priorities and start saving money, it’s important that you define the term ‘financial goals’.
Financial goals definition
What’s the definition of a financial goal? Here’s a good one: Financial goals are concrete and measurable goals that you can attain with a specific amount of money.
Keep in mind that financial goals can mean different things to different people.
Personal financial goals examples
Some personal financial goals might include:
- Saving three to six months worth of expenses
- Saving $300 per month for a year to fund your next trip
- Paying off high-interest debt
- Getting your student loan balance under $50,000
- Increasing your net worth by $20,000
- Cutting back on food spending and budgeting a total of $200 per month
Here are six ways you can determine your financial goals and priorities.
1. Review your spending
The first thing you should do is review your spending for the past 90 days. Your actual spending will give you insight into your most frequent expenses and show you where you may be able to cut back.
Look at the top three non-essential areas where you spend money. So, maybe for you this is Starbucks, the movies, and food delivery services. Knowing your spending habits and where you are likely to spend your money can help as you go through the process of determining your financial priorities.
You might realize that you don’t really prioritize spending at Starbucks. Instead, \you just grab a latte out of habit before work. Reviewing your spending is the first step into a larger process of determining exactly what your financial priorities are.
2. Understand needs vs. wants
You might think that one of your financial priorities is to get rich or travel the world. But the thing is: You still have to pay rent, cover your bills and eat. When determining your financial priorities, you need to understand and identify the differences between needs and wants.
A need is something you must have; something that you need to survive. You need a roof over your head, food to eat, and healthcare. A want is something that isn’t necessary but likely adds value to your life.
When it comes to financial priorities, your wants may trump your needs. But you have to factor in your needs.
3. Know what’s important to you
Determining your financial priorities comes down to one key thing — knowing what is truly important to you. Money is used as a tool to achieve your life goals.
Do you want to travel or quit your job? Do you want to start your own nonprofit or adopt cats? Make sure you have a vision for your life and know what’s important to you. This can help you determine your financial priorities and create a game plan.
Remember: Saving money isn’t just saving money — it’s a downpayment for a house or your anniversary trip. Investing isn’t just investing – it’s making sure you don’t have to work until you die.
4. Look at your net worth
Aside from knowing what’s important to you, looking at your net worth can also help determine your financial priorities.
What’s your net worth? It’s your assets minus all of your liabilities. So, think of your assets as cash, savings, investments, etc., and liabilities as any debt payments.
If your net worth is negative, don’t panic! But that’s a surefire sign that paying off debt should be a top financial priority.
If your net worth is positive but isn’t very high, you may need to prioritize saving and investing. Just remember: Examining your net worth is a good way to determine which financial priorities you need to focus on.
5. Compare short-term and long-term goals
With many different savings priorities, it can seem impossible to manage them all. This is why comparing your short-term and long-term goals is important.
Your long-term goals will likely be retirement. But your short-term goals might be things like taking a trip, moving, or buying a car. Right now, your short-term goals might be a higher financial priority, yet your long-term goals are still an important part of your financial picture.
So, write down your goals. After everything is listed out, number them in order of importance. This can serve as a guide to get started on your financial priorities.
6. Check your financial buffer
If you don’t have a financial buffer, none of your financial goals matter.
Why? Because every month another emergency will wipe out any progress you made to your financial goals. You may get a parking ticket or lose work time because you’re sick. Or, what if you have an unexpected vet bill.
Yes, paying off debt is important, but you’ll always be stuck if you don’t have a financial cushion to protect you when unexpected things come (and they always do).
How to get started
Once you move through this process and determine your financial priorities, it’s time to take action to achieve your personal finance goals.
You can start by cutting out any extra expenses that don’t serve your ultimate financial priorities. Then, calculate how much you need to put away each month to reach your financial goals. Lastly, get your friends and family on board to support your journey.