Setting a long-term financial goal is one of the MOST IMPORTANT aspects of your own personal finance journey. It helps shape your whole personal finance strategy. It’s so important that I just capitalized all those letters. :)
There are short-, medium-, and long-term financial goals and each is important in its own way. Short-term financial goals involve the next few weeks or months, like staying within your eating out budget for the month. Medium-term financial goals extend for the next 2-5 years. Maybe you are keen to save enough money for a house down payment or a car or the vacation of your dreams. But long-term financial goals are overarching goals that help set the direction for your whole life.
Much like values, long-term financial goals help order and organize our decisions on spending, saving, and investing. Identifying and articulating long-term financial goals helps us understand what steps we should take next in our personal finance journey.
There are many different ways to think about long-term financial goals, depending on what makes sense to you. But first and foremost, a long-term financial goal should be EXCITING! It should be an ambitious pie-in-the-sky type of goal that brings a grin to your face and a spring to your step. Because the funny thing about personal finance is that when you break those pie-in-the-sky goals down into smaller pieces of spending and saving and investing they suddenly become a lot more attainable. So when setting your long-term financial goal, push yourself a bit farther than you might normally dream. (It should be in the realm of possibility as well - “billionaire” is probably out of reach for most of us).
Secondly, while long-term financial goals are ostensibly about money (it’s called a financial goal, after all), they are actually about our lifestyles. When setting a long-term financial goal, we should think broadly about the way we want to live and how that will affect our finances. It’s not about getting to a certain dollar amount - it’s about using our money as a tool to help us accomplish our goals. For example, a friend recently mentioned that she dreams about a time when she could always tip 100% at every restaurant. I love this thought because it encompasses not only a financial goal (a doubled restaurant budget) but expresses how she wants to live and what kind of person she wants to become.
The most straightforward way to set a long-term financial goal is to identify which rung of the financial ladder you would like to reach. The financial ladder illustrates the continuum of finances, and can be an easy way to identify where you are currently and where you would like to be in the future.
Once you identify which level you are aiming for, you need to specify how that will manifest itself in your life. Our long-term financial goal is to reach financial independence, which we envision as the freedom and flexibility to pursue our values and interests without thinking about money. Maybe you want to switch gears into a different career when your kid goes away to college. Maybe you long for a small cabin by the lake with enough time off to take a three day weekend every month. Maybe you dream about being able to sponsor 100 clean water wells every year. Maybe you would love to support the entrepreneurial dreams of local college students. Maybe you want to quit your job and volunteer full-time at the local Habitat for Humanity ReStore.
Of course, the next step of the long-term financial goal is actually putting it into action. Time management experts advise you to take any goal, break it down into small pieces, and then plan which piece you will tackle each day. When you work on a goal every day you necessarily make progress (even when it feels like you are going around in circles or trudging uphill both ways). This is just as true for financial goals, although once you set your spending and saving habits it becomes fairly automatic. While long-term financial goals can affect your daily life, they don’t have to take a lot of work every day.
For me, there are two primary ways that my long-term financial goal affects my daily life:
I know why I am saving money RIGHT NOW, and;
I have a clearer direction for spending.
First, I understand why I am saving money. I grew up understanding that it was “good” to save money and even that I needed to start saving early for retirement. But saving money often feels quite abstract - what am I saving the money for? There are a lot of short and medium-term answers (emergency fund, down payment, etc.) but those aren’t always very compelling to me. But now, I know that I am saving my money for financial independence. And that is HIGHLY compelling - because I am so excited to taste that freedom of not making decisions based on money!
Even more than that, I also understand why it is important to save money RIGHT NOW. The money that I invest right now is worth more than money I will invest later. If I put $100 in an investment account today, in ten years I should make approximately another $100. If I put $100 in the account five years from now then I will only make $50 by the time I hit that ten year mark. So money I save now has more time to grow and get to work. I don’t have to begrudge the money I’m saving now - it’s going to be the most helpful in getting me to my financial goal!
Second, my daily spending decisions change in light of my long-term financial goal. Before, I would look at a purchase and ask myself, “Do I want this?,” but now I ask myself “Do I want XYZ more than I want to reach financial independence?” For some things the answer is definitely yes. I am often willing to put off financial independence in order to have things now - like a reliable bike, a new pair of all-weather boots, a wardrobe refresh at the thrift store, or tickets to the theatre. But many things began to pale in comparison with the allure of financial independence - daily lunches out, brand new clothes, a new car, a big apartment, gourmet cooking ingredients, new books, subscription services, and fancy phones. After a few weeks of asking myself this question, it started to become a habit, and now I can more quickly weigh the worth of purchases automatically in my head.
Embracing my long-term financial goals has been remarkably life-changing for me. It has taught me to extend my dreams and to be confident in my financial decisions. I hope it may do the same for you!
What are your long-term financial goals? How do you tackle a large goal on a day to day basis?
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