Financial Goals: What They Are and How to Plan Them

Financial goals are specific outcomes a person wants to achieve with money over a defined or flexible period of time. They can help provide direction for saving, spending, investing and other financial decisions.

What Are Financial Goals?

A financial goal can relate to an expected future need, planned purchase, financial milestone or other objective that requires money. The goal may be short-term, medium-term or long-term depending on the expected time horizon.

Why Can Financial Goals Matter?

Without clear goals, financial decisions may be made without considering how they affect future needs. Defining goals can make it easier to estimate how much money may be required and when it may be needed.

Goals can also help determine whether different money should be treated differently based on timing, accessibility and acceptable levels of risk.

Types of Financial Goals

Short-Term Goals

Short-term goals generally relate to needs or objectives expected within a relatively shorter period. The exact definition of short term can vary depending on the individual and the goal.

• Building an emergency fund.
• Planning a major purchase.
• Creating a reserve for expected expenses.
• Reducing certain financial obligations.

Medium-Term Goals

Medium-term goals may involve objectives that are further away but still have a reasonably defined time horizon.

Long-Term Goals

Long-term goals generally involve objectives that may take many years to achieve. The value of money, investment returns, inflation and changes in circumstances can all affect long-term planning.

How to Define a Financial Goal

A useful financial goal often includes several basic elements.

• Objective: What are you trying to achieve?
• Amount: Approximately how much money may be required?
• Time horizon: When might the money be needed?
• Priority: How important is the goal compared with other goals?
• Flexibility: Can the amount or timeline change?

Financial Goals and Time Horizon

The amount of time available can influence how a person approaches a financial goal. Money needed soon may require greater accessibility than money intended for a goal many years in the future.

Time horizon alone does not determine the appropriate financial decision. Risk, personal circumstances, expected needs and other factors may also be relevant.

Financial Goals and Inflation

For longer-term goals, the future cost of goods and services may differ from their current cost. Inflation can reduce purchasing power over time, which means a future financial target may need periodic review.

Reviewing Financial Goals

Financial goals do not always remain fixed. Income, expenses, responsibilities, priorities and market conditions can change over time.

• Review whether the original goal is still relevant.
• Update estimated costs where necessary.
• Consider changes in the expected time horizon.
• Review progress periodically.
• Consider whether priorities have changed.

Common Challenges

• Setting goals without estimating the required amount.
• Ignoring inflation for longer-term objectives.
• Using the same approach for goals with very different time horizons.
• Not reviewing goals when circumstances change.
• Taking more financial risk than a goal or time horizon can reasonably accommodate.

Key Takeaways

• Financial goals provide direction for future financial decisions.
• Goals can differ based on amount, priority and time horizon.
• Short-term and long-term goals may require different considerations.
• Inflation and changing circumstances can affect future targets.
• Periodic review can help keep financial goals relevant.