Is there a difference between planning to “save more money” and planning to “save $1,000 by June 1?” Clearly, there is.
When you attempt to hold yourself to achieving a specific goal in a set amount of time, you are more likely to realize success.
Many goals can best be achieved with the help of interim milestones, or benchmarks. A benchmark can help keep you on track and keep a long-term goal more immediate and relevant.
Why are benchmarks important?
Benchmarks are important because, although we may have long-term goals, humans have short-term outlooks.
A goal that can take months, or even years, such as paying off a credit card, is easier for us tackle when we look at it in terms of what we can accomplish each month.
Benchmarks not only allow you to celebrate your successes, but they provide an opportunity to review your progress and make any necessary changes.
Personal finance benchmarks
A personal finance benchmark can include a certain amount you want to save, a certain amount of debt you want to pay down, or almost any other relevant measurement.
A benchmark can even be a zero. For example, you can plan not to increase your debt by a single penny during the coming year.
Setting financial goals
Goals should be challenging, but if you are just getting started, set small goals with shorter benchmarks so you can get a few wins under your belt before moving on to bigger challenges.
You can probably pretty easily think of a few things you’d like to accomplish, but you should approach setting financial goals and milestones in a systematic manner.
Start by spending a few minutes thinking about what you want to achieve, the issues that bother you the most and opportunities you want to take advantage of.
To help you get started, consider broad categories of personal finance benchmarks that are relevant for almost any individual or family. These might include: setting up an emergency fund, only using cash for expenses and not relying on credit, saving for retirement, or paying off debt.
If you aren’t sure which financial goals you should be working towards, log into your free Mint.com account and click on the “goals” tab. Mint will suggest custom-tailored goals based on your individual profile.
It’s easy to set a goal and Mint will help you keep track and stay motivated until you reach your final destination.
Also, as part of the Mint.com Money Boo Boos Sweepstakes, any goal set during the month of January 2013 automatically enters you to win a $500 weekly prize. Make 2013 the year you finally start working towards achieving your financial goals!
Assigning dollar figures to your benchmarks
When it comes to assigning a dollar figure to benchmarks, situations will vary. But there are some useful generalities.
If your goal is to establish an emergency fund, then create a goal to save enough cash to cover at least three months worth of living expenses.
First, figure out how much you need to save, and then give yourself a time frame.
It’s easy to say, “I need to save this much.” But by simply saying, “I need to save this much by this date,” you have defined you goal.
If you want to reduce expenses so you can stop relying on credit and start saving more, make a habit of tracking where your money is going. Your total expenses should not exceed more than 80 percent of your income after taxes.
Mint will track your expenses for you, identify ways to help you save, and send you emails and mobile alerts when you go over budget. You can’t start cutting costs until you know where your money is going, so start tracking today.
Finally, your total debt payments should not be more than 35 percent of your after-tax income. I know it’s tempting to throw a chuck of change at your debt, but the last thing you want to do is start the vicious cycle of coming up short on cash each month and relying on credit to bridge the gap.
Get a total of your debts, calculate a realistic monthly payment based off your income, and figure out how long it will take you to pay it off.
Consider calling your lender or credit issuer to inquire about payoff options. Most can provide payoff schedules based off your interest rates and amount of debt.
Who knows? Maybe you can even negotiate a lower interest rate and pay that debt down even further.
How to use benchmarks to mark progress
Once you have set your goals, it’s time to define your benchmarks. This is especially important if your goal is particularly challenging or requires a long period of time.
Benchmarks should be both long- and short-term — you can have a milestone marked six months from now, at the end of each month, or even each day.
Use your benchmarks to analyze your where you are in reaching your goal. Are you right on target or even a little ahead? Then up the ante and challenge yourself!
Are you struggling to keep up or even falling behind? You may have unknowingly set a goal that is too ambitious and runs a high risk of failure.
If you commit to a goal and your interim benchmarks suggest you won’t make it, then by all means – modify your plan.
For instance, you can extend the time to save up for that down payment or make smaller monthly payments towards debt.
This is your goal after all, so set yourself up for success!
“Using the Power of Benchmarks to Reach Financial Goals” was written by Mark Henricks.