Strategy #2: Define Your Saving Goals
Do you have specific life goals in mind? In order to get there, you’ll need money and good financial planning to achieve them. This starts with specific saving goals and taking the right actions. By setting clear goals, you’ll see how every decision matter in shaping your greater financial health.
In my early working days, I used to set aside any extra into my savings account and it was exciting to watch it grow. However, just leaving it there and watching it accumulate passively also became uninspiring as it was a slow crawl towards reaching my bigger financial goals.
Without clear financial goals, you may overspend on things without considering how it may add up later on. As the saying goes, a goal without a plan is just a wish.
To get started, list your goals down according to priority. Here are some questions you may ask before you start:
- What do I want to achieve?
- How long will this take?
- Am I saving consistently and intentionally to achieve my dreams and life goals?
Examples of Financial Goals:
- Building an emergency fund
- Paying off debts
- Saving up for holiday getaways
- Saving for a down payment to buy a car/property
- Saving for a child’s education
- Starting a business
- Saving for retirement
By following through Strategy #1 above, you can add onto the worksheet your monthly income to know if you have net savings at the end of the month.
Here is the formula:
Income – Total Expenses = Net Savings / Opportunity to Build Wealth
If your net savings is negative, this means you’re increasing your debt and have financial leakage which will result in having to use future income to pay it off. To stop financial leakage, you must find ways to manage your expenses first.
If your net savings is positive, good job! You should increase your savings by managing your expenses effectively.
Remember that it’s not just about the numbers when it comes to setting financial goals; it’s all about establishing good habits and building character too! If you’d like to raise your chances of success in meeting financial goals, simply follow the SMART method.
Set SMART Financial Goals
SMART is an acronym that stands for Specific, Measurable, Attainable, Realistic and Timely. SMART goals help you evaluate your progress to determine how close you are to realizing your goals.
Below are two important SMART goals you should consider:
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Starting An Emergency Fund
Life is unpredictable so it’s important to always be prepared. Saving for emergencies should be one of the first goals you set, regardless of where in life you’re at. Emergency funds can be considered a lifesaver to guarantee the financial well-being of individuals and families.
Without emergency funds, you may end up with credit card debt or taking another personal loan when the unexpected happens. As a general rule of thumb, your emergency fund should cover at least 3 to 6 months of your monthly expenses.
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Paying Off ‘Bad’ Debts
To set off towards financial freedom, one of your first financial milestones to prioritize would be paying off bad debts. Settling bad debts means you’re freeing up your monthly cash flow.
For instance, rather than putting RM10,000 towards a fixed deposit with an interest rate of 2.5% per annum, you should take this money to pay off your debt that may be worth RM10,000 as well (let’s assume the interest rate is at 7% per annum). This way you’ll actually gain 4.5% in terms of interest savings.
Compound interest has been called the ‘eighth wonder of the world’ and those who understand it, earn it; those who don’t, pay it. For example, if you’re using your credit card and only pay off the minimum amount each month, the interest on the amount you owe will compound every month. This will result in an increase in the interest on the amount you owe every year.
If you follow Strategy #1 you may have discovered that some of your debts/loans exist because of overspending, missing credit card payments or due to having to pay for emergency expenses.
To get out of debt as quickly as possible, list your debts from the highest interest rate to the lowest. Make the minimum monthly payment towards each debt but throw all of your extra cash towards paying off the debt with the highest interest rate.
If you don’t want your debt to pile up again, make a conscious decision to :
- live within your means
- set bills on autopay
- settle your monthly credit card charges in full and,
- whenever an emergency arises, be prepared to pay it off with the emergency funds you’ve set aside earlier.
Click here to download MY SAVING GOALS TRACKER.
Note: Good Debt vs Bad Debt.
Good debts are debts that help you generate income and build your net worth. It has the potential to increase your net worth or enhance your life in an important way. Examples of good debts would be education loans, mortgages and/or business loans.
Debts are generally considered to be bad if you’re borrowing money to purchase depreciating assets or consumables. Borrowing money to purchase cars, clothes and/or consumables you can’t afford can be categorized as bad debts.
