Failing to reach a financial goal can be infuriating – especially if the same goal keeps slipping through our fingers. As we discussed last week, the process of repaying debt is an expensive yet effective way to learn good financial habits.
If you’ve never had any debt, you are already doing well. However, saving for your first short-term goal can be as challenging as repaying debt.
This week we’re going to share some strategies for reaching short-term financial goals. We’ll also share the most common reasons why people fail to reach these goals and what to do about it. Next week we’ll look at some strategies to reach the ultimate financial goal – financial independence.
The most important short-term goal is putting together an emergency fund. As we discuss in this article, an emergency fund is the financial starting block for all future financial goals – it’s your financial security blankie. In this article we’re going to use saving up an emergency fund as an example, but the same rules apply for any short-term financial goals you might have: saving for a wedding, a deposit for a car or house or something pretty that will make your heart happy.
Short-term financial goals are for money you’re planning to spend in the next five to ten years. It’s money you can imagine yourself spending, as opposed to long-term savings for one day when you’re much older.
Finding money to save
The first step to setting money aside towards a goal is actually having the money. We tend to think our savings is money we’ll earn in addition to the money we currently have. We like to kick the can down the road to our next gift, raise or new job.
The great news is you already have the money you’re going to save. The bad news is you have to go find it. When we live to our last cent, it seems like the things we spend our money on are things we can’t live without. However, most of us have some money we spend on things we don’t need. Start with things that provide immediate gratification like takeaways and cold drinks.
It’s a mistake to assume an amount of money is too small to make a material difference to our savings. Every rand you don’t spend today is a rand that will work for you later. One day the money you didn’t spend in the moment will work so hard for you that you don’t have to work at all. Wouldn’t that be lovely?
Setting a short-term goal
Financial goal-setting requires two things:
- An amount
- A deadline
You can’t set a financial goal unless you know how much money you’ll need and when. Your goal amount depends on what the money’s for. For example, an emergency fund is one month’s living expenses times three. For most of us, that’s enough money to get through a difficult financial time. The deadline is just when you’ll need the money. If you’re saving for a wedding or a holiday, the deadline usually comes before the goal amount.
This OUTvest tool is a great way to see how to set a financial goal.
Time is your friend
Theoretically you can save any amount if you have enough time – that’s why long-term goals are often easier to reach that short-term goals. Sadly we give up on long-term savings when we miss our short-term targets. We miss our goals when we don’t have enough time.
Since you’ve already found the money you have to save, there’s an easy formula to work out if you’re going to reach your target.
Divide the goal amount by the number of months you have to save.
For example, you want R40,000 in your emergency fund in a year. You have to divide 40,000 by 12 to find out how much you need to save every month to reach your goal.
If the answer you get is more or less in the ballpark of the money you found in your budget, you are getting what your heart desires. If it’s more, you need to adjust how much money you’ll need or when you need it. Is it possible to find some more money in your budget? Can you save for a bit longer? Both of these actions will help you reach your short-term goal.
If you don’t have R3,300 to save towards your goal of R40,000, how about saving that amount over a two-year period? R1,600 might be easier to reach. Still not? Do it over three years. That gets you to R1,100 per month. Continue this process until you get to an amount you can reach every month. Remember, no amount is too small if you have enough time.
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