You know you want to get ahead with your finances. Maybe you imagine this as feeling financially secure, knowing your family will always be taken care of, or as reaching a place where you feel you can finally relax and enjoy your money.
If you dig a little deeper into this vision, what are the specific accomplishments that you see? Do you imagine owning your own home or living completely debt free? Maybe you picture helping a family member pay for college or being able to afford a certain lifestyle in retirement.
These specifics are called your savings goals, and even if they still seem abstract or far off, it can be important to take the time to list them and think through as many details as you can. Identifying your goals is typically one of the first steps in the financial planning process.
Let's look at why savings goals are so important to successful planning, and how you can start to refine your own goals.
Why goals matter
Knowing your destination can help you map the best path to get there. Particularly for large or ambitious goals, it can be helpful to plan the specific steps you'll take to bring your goal into reach. Identifying your savings goals can help you:
- Choose an appropriate investment mix. For some goals, such as ones that are years away, you might be better suited with an aggressive asset allocation that provides the potential for higher returns but comes with higher risk. For short-term goals, you might need a less aggressive investment mix even if it means lower potential returns. To learn more about risk tolerance and asset allocation visit Fidelity Viewpoints: 3 tips for choosing investments.
- Identify the appropriate account types. Saving and investing in tax-advantaged accounts can provide powerful benefits over time, but you need to choose an account type matched to your goal to make the most of the strategy and avoid potential penalties.
- Fine-tune your contribution amounts. Planning your goals can help you figure out how much to contribute to each—whether you're crunching the numbers on your own or working through them with a financial professional.
- Measure your progress and adjust as needed. With an end-goal and plan in mind, you can keep tabs on your progress and adjust quickly if you start to get off track.
Finally, identifying your goals can give you a sense of purpose for all the hard work you put into your finances, and a feeling of accomplishment when you reach those mile markers you've set for yourself. After all, you can't cross the finish line if there is no finish line. When you have a clear goal, you'll have a way of knowing when you've arrived.
What you need to identify
What does it really mean to identify your goals? As your vision of your future starts to come into focus, there are a few details you'll want to try to pin down for each:
- What it is. Some goals are universal, like establishing and maintaining your emergency savings, while others may be unique to you. Coming up with yours can be a chance to express your values and dream big.
- When it is. This is also called your time horizon. It's important because it informs how much risk to consider when building your investment mix for that goal, plus determines how long you have to build up your savings.
- How much you'll need. Putting a price tag on each goal is a crucial detail that can help you determine the right savings rates and track your progress.
Consider writing your goals down so you have a tangible reminder of what you're working toward. Also, list some goals that feel more like dreams than sure things. After all, figuring out your goals is partly about defining your financial aspirations, and you'll be able to revise your list as you go along.
How to avoid getting stuck
For some, making long-term plans is an exciting way to think big and build momentum. For others, it can be paralyzing to feel like you need to map out the rest of your life milestones with any certainty.
Here are some common roadblocks you might run into and how to consider handling them:
- You're worried your goals might change. There's a good chance they will, and that's okay. Do your best to think through your plans, but know that whatever you come up with will still only be a draft.
- You don't know how much you need. Picking price tags for your goals can be intimidating. Calculators and general guidelines might help you start to narrow down your estimate, but many people find it helpful to work through the numbers with a financial professional.
- Your future is a blank slate. Maybe you truly aren't in the right place in life to choose concrete savings goals (beyond the essential ones of retirement and emergency savings). In that case, consider adopting a catchall goal for now, such as "building wealth," until more definite plans start to emerge on your horizon.