11/16/2007

Personal Financial Tracking and Four Steps to Establishing and Achieving Personal Financial Goals

It is said that “people never plan to fail; they just fail to plan.” It can also be said that setting a detailed plan for personal financial tracking is far different than merely aspiring for something. Getting out of debt, buying a new home, or creating a work/life balance requires a clear strategy, actionable tasks and deadlines to accomplish well.

Imagine managing your own personal finance as if it was your own business. Like every (successful) company, each has its own business plan that includes specific financial goals and game plan crafted over a period of time. Think of this business as “Me Incorporated,” where the “Me” is your collective net worth (savings, investments, assets), including various departments that have their own budgets and spending patterns. To grow “Me” over time takes a lot of hard work, determination, online personal financial tracking and a process called goal setting.

Here are some guidelines to setup and achieve your goals:

1. Less is more. Setting fewer goals means you’re far more likely to remain focused and accomplish what you’ve set out to do. For example, paying off your car loan and getting your credit card debt may be admirable, but probably not realistic to happen concurrently. Focus on one significant goal at a time, then move onto the next.
2. Be precise. Setting a goal to buy a house in 5 years is less effective than setting a goal to buy a house by June 2011 with $100,000 saved as a down payment. Detailing the steps to get at a measurable target also provides an opportunity to do a reality check with yourself, and to make some hard decisions along the way.
3. Track regularly. Regular check-ins with yourself helps ensure you’re on the right path. You may need to either tweak a certain aspect of your “Me” business, like cutting some expenses from certain “departments,” or to change strategies altogether. Regardless of your choice, through regular check-ins you’re directing your energy and work toward doing that most important thing: moving “Me” in the right direction.
4. Work up to the Big Goals . Know which goals are short-, versus medium- and long-term. In some cases, the short-term goals are needed to achieve a long-term goal. This process of categorization is an important part of managing “your business” comfortably and not feeling overwhelmed when trying to accomplish the usually bigger and longer-term goals.

Whether your goal is big or small, creating that list and checking it twice is especially useful during the Holiday season, when the business of “Me” sees its busiest season.

Example: Establishing and Achieving a Goal

Let’s assume you want to save for a new iPhone by February ‘08. You’ll need $399 for the phone itself, plus for simplicity about $100 per month for the plan. Now let’s assume that your current plan charges $80 per month, which means you’ll need to cut $20 per month to keep your monthly spending even. (One way to gain it back is by selling some devices for which the iPhone replaces, like your iPod. But again, for simplicity, let’s assume you’re wedded to all things Apple.)

Step 1. The Goal. In this case, you want to save $399 in four months, plus the rate plan price difference for, say, four months — so $480 total.

Step 2: The Plan. Identify how much you need to save to reach your goal. Now, my example is simple. You’ve got four months to save $480. Since the goal is very short-term, investing your savings is not going to help you much. So, I’m just saving $120 every month for four months. (Tip: for more complex and longer term goals, use one of the many nifty calculators on the web which accounts for expected rate of return and inflation. Here’s one such calculator for your convenience.)

Step 3. The How. Now that you know how much to save, it’s going to be helpful to review what you’re spending by category with a online personal financial tracking tool like Mint.com to see what can be cut or reduced. Aim for attainable percentage reductions in specific areas, like Dining Out or Shopping, and then set up a budget level and an alert for your target amount. These alerts are displayed on the Overview page, and you can also tell Mint to send them by email or to your mobile phone.

Step 4. Enjoy your new Phone…and the satisfaction of a goal achieved, and debt avoided!

Do you have your own personal method to achieving your financial goals? Please feel free to share!

Having difficulties with your personal financial tracking to reach your financial goals? Sign up for Mint.com today and refresh your finances!

Further Reading on the Topic:

Personal Financial Tracking

Online Personal Financial Tracking

Tracking Finances