61% of Americans don’t have sufficient savings to cover a $1,000 medical emergency. An average American adult loses approximately $1,634 per annum due to a lack of financial literacy. However, individuals with well-thought-out financial objectives and a framework to achieve these objectives can lead a comfortable lifestyle. They meticulously save money and invest the saved money to generate huge wealth in the long term. They also know that short-term financial objectives act as catalysts to achieve long-term financial goals and open doors for creating enormous wealth.
Here is a guide that helps you understand everything that you need to know about short-term financial goals. It covers several examples of short-term financial goals and describes the detailed process involved in creating them. Grab a cup of coffee and read through this guide that helps you kickstart the journey toward becoming financially secure.
What are Financial Goals?
A financial goal is a saving, investing, and spending objective that you want to achieve at a specific time in your life. Financial goals help you develop a holistic financial plan. Additionally, they encourage you to save money to acquire something that is financially out of reach right now.
A few examples of financial goals are:
$1,000 for a Bicycle: A school-going kid may want to save a few months of pocket money to purchase a bicycle.
$10,000 for a Used Car: A young working professional might want to set 20% of his monthly salary aside for the next few months to create the fund required to purchase a used car.
$50,000 for the Downpayment on a Dream Home: A newly married couple might want to create a fund of $50,000 as a downpayment for their dream house within the next three years.
$1,000,000 for Retirement: A 30-year-old working professional may want to save and invest money to create a retirement reserve of $1 million by the time he retires from active working life.
Short-term, Med-Term, and Long-Term Financial Goals
One can classify financial goals into short-term goals, mid-term goals, and long-term goals. The timeframe is the factor that differentiates between short-term, mid-term, and long-term goals.
Within Three Years: Short-term financial goals are the objectives you want to reach within one to three years.
Three to Seven Years: Medium-term financial goals are the objectives with a timeframe of three to seven years.
More than Seven Years: Long-term financial goals have a timeframe of more than seven years.
To become financially secure, you should focus on creating all these three types of financial objectives. If you don’t have financial goals, you may end up spending more than you should on unnecessary or unwanted activities.
We are living in an uncertain world. Even a well-educated economist can’t predict a pandemic or crisis. The prudent decision is to prepare for any kind of crisis through proper financial planning.
Importance of Short-Term Financial Goals
Short-term goals are the first steps toward financial planning. They are the cornerstone for the financial security of your life. The following are the reasons why you should create short-term financial goals:
Develop a Habit of Budgeting
Fulfilling short-term financial goals requires creating budgets and cutting down on unnecessary expenses. Budgeting is the vital process of creating a plan for how much money to spend. Short-term goals can help ensure that you create a budget that deters you from overspending by encouraging goal-based investing.
Encounter Crisis Situations
Every individual should have sufficient money to handle emergencies or crises. Short-term financial goals ensure you create an emergency fund that effectively tackles medical emergencies and COVID-19 like pandemic situations.
Clear Off Expensive Debt
Short-term financial objectives emphasize clearing high-interest debts like credit cards and personal loans. By developing short-term financial goals, you can avoid falling into the vicious cycle of debt.
Open Doors to Generate Wealth
Every big success begins with a small step. The journey of creating huge wealth would also start from short-term financial goals. If you don’t have short-term financial goals, unplanned events like medical emergencies, credit card bills, vacation, and home improvement may derail your journey of creating wealth in the long run.
Five Examples of Short-Term Financial Goals
Do you have short-term financial goals? Have you ever tried to create them? Here are a few examples of what short-term financial goals look like.
- Emergency Fund
- Downpayment for a House
- Money for Home Improvement
- Family Vacation
- Pay Down the Expensive Debt
Short-term Financial Goal One: To create an emergency fund of $20,000 within the next 18 months.
It is advised for people to maintain an emergency fund that covers the expenses of at least six months. For instance, an individual with a monthly average household expenditure of $3,000 should maintain an emergency fund of $18,000. You may consider rent, groceries, entertainment, equitable monthly installments (EMIs), commuting, gas, electricity, water, out-of-pocket medical expenses, and sanitation while calculating the emergency fund. These expenses differ by individual. By noting down all mandatory monthly expenses, you can calculate the emergency funds you need.
Short-term Financial Goal Two: To create a house downpayment fund of $50,000 within the next 24 months.
Downpayment for a House
Buying a house is a dream for many people. However, to be able to buy a home, many individuals need to have enough funds to pay for the down payment. For instance, the borrower may need to make a downpayment of up to $50,000 to purchase a house worth $250,000. Unless you allocate a certain percentage of your income every month, you may not be able to create a downpayment fund.
Short-term Financial Goal Three: To arrange $20,000 for home improvement within the next 12 months.
Money for Home Improvement
The cost of house remodel in the United States varies from $19,800 to $73,200, depending on the size and quality of materials you use. If you don’t plan and create a home improvement fund, you may end up taking a personal loan or using a credit card for the renovations. Nearly 1/4th of U.S residents have personal loans; about 25% of them have taken personal loans for home improvement purposes. We recommend you start pooling the money for home improvement at least one year before the event rather than taking the debt to finance it.
Short-term Financial Goal Four: To create a family vacation fund of $10,000 within the next 12 months.
Do you know vacations and family holidays help you keep family harmony? It is good to plan a family vacation once every year or two. Having a financial plan that enables you to save money for your upcoming vacation is always a good idea rather than using credit cards. The average credit card interest rate is 16.17%, which is quite expensive. This could be devastating to your financial journey if you don’t pay credit card bills on time.
Short-term Financial Goal Five: To pay off the expensive debt of $XXXXX by saving for the next 12 months.
Pay Down Expensive Debt
Paying down expensive debt should be the priority for a prudent individual. The journey towards financial independence starts with paying off outstanding debts. They include credit cards, personal loans, and payday loans. Unfortunately, most people enter into a vicious cycle of debt by taking another loan to consolidate the existing loans. Rather than doing this, we suggest people actively save money to repay expensive debts.
How to Set Short-Term Financial Goals
Financial planning can be a life-changing event if you do it with honesty and conviction. Here are various steps involved in setting short-term financial goals.
Analyze Current Financial Situation
Before creating a financial plan, thoroughly analyze your finances. These are a few considerations:
- How much expensive debt do you have (personal loans, credit cards, and payday loans)?
- Do you have an emergency fund?
- Do you want to plan a family vacation in the next 12 months?
- Do you have a plan to purchase a house in the next 24 months?
- Do you budget to track your income and expenses?
Identify Your Pain Points
It is important to determine which areas of your finances are becoming the most burdensome in order to address those needs better. For example, a credit card company is pressuring you to make the payment. Perhaps, you are worried because you don’t have $2,000 to cover medical or other emergencies. If you have these kinds of pain points, your short-term financial goals should focus on addressing them immediately.
Create Budget for Mandatory Short-term Financial Goals
Once your pain points are addressed, you may focus on creating a budget for two mandatory short-term financial goals. They are:
- Clearing expensive debt.
- Creating an emergency fund (to cover at least six months of your mandatory expenses).
When creating the budget, write down your monthly income, mandatory monthly expenses, and the existing debt you have.
For instance, your monthly after-tax income is $5,000, mandatory monthly expenses are $3,000, and debt is $10,000.
In this case, you will have $2,000 in extra income. This $2,000 should be used to clear the debt and create an emergency fund. For example, you can allocate a fixed amount of your income, around $1000 a month, to clear the debt of $10,000 within 11 to 12 months. The remaining $1,000 can be used to create an emergency fund of $12,000 within a year.
The financial objectives such as vacations, house downpayment, retirement planning, and child education planning can wait. Do not allocate your income to anything until you achieve these two mandatory short-term financial goals.
Apply SMART Criteria
The short-term financial objectives should meet the SMART Criteria (Specific, Measurable, Attainable, Relevant, and Time-bound).
Specific: The short-term financial goals need to be unambiguous and clear.
Measurable: You need to mention how much money you need to achieve the goal. It allows you to track your progress over the period.
Attainable: Short-term financial goals should be achievable. Don’t set unrealistic goals, as they may derail your journey of financial planning.
Relevant: Short-term financial goals should align with your values, beliefs, convictions, and long-term objectives. If the goals aren’t relevant, you may end up losing the steam to stay vigilant.
Time-bound: Short-term financial objectives must have a deadline of three years or less. Without the timeline, you may not feel the sense of urgency to achieve the goal.
Monitor the Progress
You need to celebrate targets and milestones in your journey. If you don’t monitor the progress, you may not recognize or evaluate your mistakes. Instead, you should keep track of the goals, re-evaluate what went wrong, and take corrective action.
Remember to follow these five fundamental principles while starting your financial journey:
- Note your SMART short-term financial goals.
- Determine how much money you need to achieve the financial goal.
- Think about all the possible ways you can reach the goal. These may include cutting expenses, earning additional money through a side hustle, or creating a passive income source.
- Create incremental goals. Create smaller or easier goals initially and achieve them; this boosts your confidence and develops a sense of achievement.
- Do not ignore mid-term and long-term financial goals as they help you create wealth.