By Shelley Koehli
Here we are, a few weeks into the new year. Are you succeeding with your New Year Resolutions this year? Did your resolutions including setting and sticking to financial goals?
As a Licensed Insolvency Trustee (LIT) and Chartered Insolvency and Restructuring Professional (CIRP), I speak to many Canadians who are looking to get back on track with their finances. One of the most important things they can do is set financial goals. Without goals, spending can be impulsive and unfocused. We tend to spend more frivolously without a particular goal in mind.
How do you go about setting financial goals? First things first, consider three types of goals:
1.Short Term – Achievable within 1 year
Short term goals should include emergency savings. We all need emergency savings for things like car repairs, sudden travel for a family emergency or short term wage loss. A good rule of thumb is to have 3 months’ worth of household expenses saved for these types of expenses. Other types of short term goals can include funds for gifts or savings for income tax that you know you will need to pay.
2. Medium Term – Achievable within 1 to 5 years
Medium term goals could be funds for a vacation, a home repair or renovation or a vehicle.
3. Long Term – Achievable within 5 to 10 years
Long term goals could be a down payment to purchase a home, paying extra on your mortgage or long term retirement savings.
In order to save for a particular goal, you need to know what that goal will cost. For example, if you want to save 3 months’ worth of expenses, keep track of your household expenses for a month or two to get a good idea of how much that would be. For example, let’s say your expenses are $3,000 per month. That means a savings goal of $9,000. To reach this over a one year period, you need to save $750 per month ($9,000/12). If that amount is not realistic, then perhaps the goal needs to be adjusted to be saved over a longer period of time. This formula should be used for all goals. Figure out the end cost amount and divide that by the time period you have to save = your target saving amount. You’re much more likely to save if you have an end result to work towards.
The other benefit of setting financial goals, is your spending will be much more focused. If you have an important goal you want to save for, you will naturally curb your spending to ensure you have enough for the goal as it is top of mind.
If you are experiencing financial difficulties and are unable to save because you are struggling with monthly minimum payments, consider obtaining information from a Chartered Insolvency and Restructuring Professional about your options. Every situation is unique and requires a personal review to ensure you are given the best information possible. For a list of trusted professionals visit the Find a CIRP section on the CAIRP website