Saving money is important for leading a better financial life. Having money in the bank can help you cope with emergencies or to achieve your dream of buying a home. Setting clear money objectives is the first step in making savings a regular part of your financial habits.
Setting clear and specific savings and financial goals is the first step to making them a reality. You should choose a goal that suits your needs, wants and abilities. You should also create a plan to achieve your goals by following the SMART system. The SMART system requires your goals to be:
- Specific: You must specify what you want to achieve with your money in detail.
- Measurable: You must specify how much money you need to achieve your goal and how you will measure your progress.
- Achievable: You should ensure that your goals are realistic and appropriate for your current and future financial situation.
- Relevant: You should ensure that your goals are important and meaningful to you and are in line with your values and priorities.
- Time-bound: You should determine when you want to achieve your goals and set a specific deadline.
Why You Need Financial Objectives
Setting financial objectives helps you turn hopes and dreams into reality. It begins with selecting an objective, then creating a plan for reaching it. For example, the Consumer Financial Protection Bureau recommends using the SMART objective-setting system. It requires your financial objectives to be:
- Specific
- Measurable
- Achievable
- Relevant
- Timebound
Defining money objectives this way can give you the guidance and the incentive you need to stick to them. Here’s what a SMART objective might look like for an emergency fund:
Here is a possible rephrased version of the text, using an accountant voice, a professional style, and a friendly tone.
| QUESTION | ANSWER | |
|---|---|---|
| Specific | What is your savings purpose? | An emergency fund |
| Measurable | How much do you need to save? | $3,500 |
| Attainable | Is this a realistic goal? | It is if I increase my income, reduce my spending, and budget. |
| Relevant | Why does this matter to you? | I want to be ready for unexpected costs. |
| Timebound | When do you plan to achieve the goal? | In 12 months |
Action To Take: Establish Two Savings Objectives for This Year
When establishing financial objectives, less can be better. Establish too many objectives and you may feel totally overwhelmed. That could make you quit before you start.
If you're not sure what to concentrate on with your money objectives, there's a simple way to do it. Pick one financial objective you can reach in the short term, and one money objective to focus on for the long term.
Short-Term Financial Objective: Save for Emergencies
An emergency fund can be a lifesaver when you face an unexpected cost. According to Federal Reserve data, 30% of Americans couldn't pay for a $400 cost using cash or its equivalent.2
If you don't have a rainy-day fund or you've used up yours, saving for emergencies should come first over other savings objectives in the short term. First, decide how much you need and want to save.
For example, you may want to save three- to six-months' worth of costs. Or you may decide to save a fixed dollar amount. You could then divide that objective to decide how much you need to save each month to reach 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.
Note
A savings objective calculator, like this one, can help you with the math.
Long-Term Financial Objective: Dream Big
When establishing your second money objective, think about what you want to achieve in the next five, 10, or even 20 years. For example, you might want to purchase a home. So saving money for a down payment and closing costs could be your big money objective. Or you may want to put away money for retirement instead.
When establishing longer-term financial objectives, begin with a fixed dollar amount. Next, work forward to figure out what you need to save monthly or yearly. For example, if you want to save $20,000 for a home over the next four years, you'd need to save $5,000 each year. That breaks down to $416 and some change each month (not including interest or investment gains).
As you establish your short- and long-term financial objectives, think about where to store 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 better when saving for longer-term objectives.
Next Actions and More Resources
Setting money objectives is an important step in the process of achieving financial wellness. Once you've established some general objectives, you can work on refining them. For example, you next can shift your attention to saving for the fun things in life, as well as the occasional surprise.
Keep reading to learn more about the advantages of saving:
- We’ve given you a few reasons to start saving, and here are some more Reasons To Save Your Money and get inspired.
- You know you need an emergency fund, in a broad sense. Make the knowing more concrete with these specific Reasons You Need an Emergency Fund.
- After you’ve found all the coins in the sofa it’s time to look for other sources of money to put away: 10 Money-Saving Hacks To Reach Your Financial Objectives.