This is Step 2 of Budget Basics – Once you have completed recording and totaling your monthly expenses and income in Step 1, you are ready to start identifying your financial goals. In order to achieve, your financial goals you need to be:
- Specific (Know exactly how much your financial goal is in terms of $)
- Achievable (Be realistic – and optimistic)
- Write it Down (Make yourself accountable to yourself)
- Make it Measurable (Set up a method to measure your success)
- Monitor (Check your progress monthly)
Set realistic financial goals
Financial goals are not the idle fantasy of sudden and extreme wealth, they are the reality that you can create for yourself if you use your money wisely. When first setting financial goals it is important to set goals that you will be able to achieve in a reasonable length of time. For example, if you are currently carrying too much credit card debt and want to eliminate it totally, you can begin by reviewing your Monthly Expenses and Income Worksheet to see the details of your current credit card debt. You might want to start a goal worksheet to make calculations and notes on.
In the case of paying down credit cards you might want to start by writing down:
- How many cards you have
- The balance on each card
- The interest rates you are paying on each card, and
- The total credit card debt owed.
Compare your Average Monthly Income to your total Average Monthly Expenses – is there money you could earmark for paying down your credit cards? If so, how much do you think you could pay your cards down by? Note: in the Average Monthly Expenses we have already accounted for the minimum payment that has to be made on each card. Let’s say that you have 5 credit cards and they look something like this:
|Cards||Current Balance||Interest Rate|
|Bank Card 1||$1587||19.5%|
|Bank Card 2||$957||19.5%|
|Department Card 1||$1285||28.80%|
|Department Card 2||$249||28.8%|
Establish a debt repayment plan
After reviewing your Monthly Expenses and Income Worksheet you see you could comfortably put $500/month towards paying down your credit cards. So it would be reasonable for you to plan that in 12 months you could be credit card debt free. There are a number of ways to approach paying down credit cards – but for this example let’s assume that you recognized that for you, paying off the smallest 2 balances first will give you the boost you will need to stick to the plan. Of course, since your goal is to be credit card free – you stop using your credit cards completely.
Monitor your progress and make adjustments as needed
Each month, when you sit down to review your budget and monitor your decreasing credit card balances, you will get the positive reinforcement you need to continue and succeed.
There are all sorts of financial goals, but whether long-term or short-term it is essential that you know where you are in terms of your current finances by setting up and consistently monitoring your finances. This is best achieved by using a written plan (aka budget) which will serve as your guide to achieving your financial goals. We will go over how to set up your budget in Step 3 – where you will see how to put your financial plans onto paper and into action.
Take the Next Step
This is the Second Step of a four part series on setting up a workable budget. The entire series can be found here:
How to create a budget you can live with: Step 1
Setting Up Your Budget – Step 3