The Modest Wallet is a free digital publication delivering its readers simple personal finance solutions. We regularly partner with brands that have products and services that will help our readers. Some of the links in this post are from our partners. How we make money.
Everyone needs a financial plan. And every financial plan begins with, guess what? financial goals. After all, if you don’t know where you’re headed, how will you know if — and when — you get there? In order to make sense of and support a properly constructed plan, goals need to be well-designed, clearly defined, and intelligently targeted. Continue reading below to find 15 favorite goals we like to see in smart financial plans.
The Best Financial Goals for 2020
You don’t have to wait to get your financial life in order. Why not start today? Here are a few easy financial goals you can achieve this year.
Pay Off Debt
Debt repayment forms the core of any realistic and helpful financial plan. But this is really more of an overarching strategy than a specific financial goal. Debt repayment encompasses a wide variety of behaviors, from cutting spending to increasing savings and income.
There are a couple of ways you can approach your debt repayment strategy. We’ll describe the two most common ones.
The Snowball Approach
The debt snowball approach was popularized by Dave Ramsey, the best-selling personal finance author and guru. Under this strategy, you focus on paying off your smallest bit of debt first, while you make minimum payments on all of your other debts. Once you’ve paid off the smallest loan, you move on to the next smallest, applying what you were paying on your first one to the second one. Then you move on to the third, fourth, and so on.
The advantage of this approach is said to be the psychological reinforcement that you get when you successfully pay off your smallest loan. And it’s called the snowball approach because the money that’s applied to each successive debt grows progressively larger, like a snowball rolling down a hill. An example may help to illustrate this.
Let’s say Mike owes $1,000 on his credit card, $3,000 on a line of credit, and $10,000 on a loan. He’s been splitting his debt repayments between each of the loans, and he decides to switch to the snowball method. He makes minimum payments on each and then puts an additional $200 per month on his smallest loan (the credit card).
When the credit card is paid off, he puts that $200 plus the minimum payment that was going to the credit card towards his line of credit. When the credit line is paid off, he puts the $200, plus the credit card minimum payment, plus the credit line minimum payment towards his loan. See how the payments toward each debt keep growing larger?
The Avalanche Approach
The debt avalanche approach is, mathematically, the most optimal approach to paying down debt. It works by maximizing the amount of each payment that goes towards the principal and minimizing the amount that goes towards interest.
You make minimum payments on all of your debts, and then pay as much as you can towards your highest-interest debt. This ensures that the highest interest debt will be paid off first.
As with the snowball approach, the benefits of early payments on high-interest loans can quickly compound as the size of the debt shrinks. Smaller debts mean smaller interest payments, which mean larger principal payments.
Whether you choose the snowball approach or the avalanche approach, the important thing is that you get serious about paying off debt.
Surround Yourself with Like-Minded People
People aiming for financial independence and responsibility do much better when they surround themselves with people who share those goals. But this can be difficult, particularly for folks who come from families and peer groups who don’t emphasize financial responsibility.
Try to surround yourself with people who are financially responsible. They’ll be less likely to encourage you to splurge every weekend or waste your money on frivolous items and services. But if you don’t have people in your circle who can support you, where can you go?
Luckily, with the internet, it’s never been easier to reach out to people who share your hopes and dreams. The Modest Wallet Community Facebook Group connects like-minded savers who want to support and help one another achieve their financial goals.
Build an Emergency Fund
Once you’ve gotten yourself out of high-interest consumer debt, nothing helps prevent a slide back into that trap like a well-financed emergency fund. Emergency funds are absolute necessities for anyone who hopes to get out of the cycle of credit-spending and repayment.
Most financial advisors suggest having at least three to six months’ worth of expenses saved up in an emergency fund. The purpose of this fund is to guard against any unexpected interruptions to income. So, for example, if you become ill and are short on sick time at work (or you’re self-employed and don’t get sick time) you’ll still be able to make ends meet.
Emergency funds can also get you in the habit of saving and only spending money that you have, rather than spending on credit. By that we mean that once you’ve become used to saving for an emergency, it’s just a matter of time until you’re saving for your everyday needs as well.
Create a Budget (and Stick to It!)
One of the best ways to ensure consistent financial responsibility is to create a functional budget and stick to it. While doing this used to be a pen-and-paper exercise, modern software and apps now make this a lot easier.
Consider using services like Mint or Personal Capital to help manage your spending. These apps will even sync with your bank accounts and credit cards to help you keep track of the money coming in and going out, ensuring you stick to your budget.
Whether you’re using a pen and paper or a piece of software, it’s important that your budget be realistic. There are a few components to making sure this happens:
- Base your budget projections on real data. Use your past expenses to estimate what your future expenses are going to be like.
- Don’t forget to budget for discretionary spending. You probably won’t be able to live like a monk for very long, so don’t neglect to budget for the occasional beer or latte.
- Don’t treat your budget like an optional nuisance. Once you’ve made one, do everything you can to stick to it. Otherwise, what’s the point of making one in the first place?
Having a realistic budget should always be part of your financial goals.
Create Multiple Income Streams
Creating multiple income streams has a number of benefits. First, it increases your overall income. This is always a plus. And for some, it’s a necessity if they want to pay off debt or build savings. Second, it diversifies your income. Similar to diversifying your investment portfolio, separate income streams reduce volatility in your income. In other words, interruptions in one income stream will have a reduced effect on your overall financial health if you have other streams to rely on.
One of our favorite ways to build another income stream is to get a side hustle. Whether it’s freelance writing or managing Facebook Ads, you’ll be surprised at how much money there is to be made in building an effective side gig. For an excellent example of this, check out our favorite side hustle development course, the FB Ads course. It’s a no-nonsense, practical guide to getting started managing Facebook advertising for clients.
There are lots of ways to make money fast with a side hustle or part-time job.
Intelligent investing is what sets the truly wealthy apart from the merely financially comfortable. Harnessing the power of compound interest and the time value of money will turn even the smallest savings account into a powerful financial asset.
Many people aren’t comfortable when they’re just beginning their investment journeys. For these folks, we’d recommend any of the newly available apps and robo-advisors that make investing truly simple and accessible. For example, apps like Acorns and Stash allow you to make small micro-investments over time to grow your portfolio.
In the past, people with small investment accounts would have seen much of their returns eaten up by excessive management expense ratios and account fees. However, many of the new robo-advisors, like Wealthsimple, provide extremely low-cost services to investors of modest means and knowledge to help them increase their investment returns.
These low-cost alternatives can have a massive impact on returns in the long run. Don’t underestimate what saving 1% per year can do for your retirement accounts.
Get our free Stock Market Playbook to learn how to invest your first $500 in the stock market.
Plus our best money tips delivered straight to your inbox.
Read Personal Finance Books
Personal finance books contain a breadth and depth of information that was truly unheard of 30 years ago. The right resources can get you on your way to understanding everything from 401(k)s and RRSPs to how to reduce your spending.
You’ll need to be a little careful when you’re looking for self-education from these books, however. While many are chock-full of indispensable advice and tips, a few disreputable authors peddle get-rich-quick schemes and dubious investment advice. But if you keep your nonsense-detectors working and remember that there’s no such thing as getting rich quick, you’ll be able to distinguish between the good and the bad with ease.
It might help to stick to established names in the industry to ensure that you’re getting good advice. People like Dave Ramsey and Suze Orman have been helping others with their finances for a long time, and they’re unlikely to steer you wrong. Similarly, online resources like The Modest Wallet can be a great free alternative to buying a physical book. Reading lots of personal finance books is a smart financial goal.
Live Below Your Means
Living below your means is a cardinal rule of personal finance. It means that you’ll always have enough to save for a rainy day, your retirement, or a treat for yourself and your loved ones. This advice is closely related to setting a budget (because you’ll need to do the latter in order to find out if you’re actually living below your means).
Living below your means doesn’t mean giving up everything you like in life. It just means that you need to be taking in more money than you spend on a regular basis. This may mean increasing income or reducing expenditures. Or this advice may already be built into your life.
This can be a difficult adjustment to make if you’ve grown accustomed to luxuries that are beyond your means. But it’s an adjustment you’ll have to make if you want to see any progress in your debt repayment or savings goals.
Save For Retirement
Saving for retirement is often the last thing on people’s minds when they’re struggling to get by day-to-day. But it’s an absolute necessity if you want to have any peace of mind. It’s also necessary if you want to enjoy life when your working life ends. No one wants to have to rely on the public purse when it comes time to enjoy their golden years.
When it comes to retirement savings, it’s important to start as young as possible. The power of compound interest is an amazing thing. $10,000 invested at age 25 is worth a heck of a lot more at age 65 than the same amount of money put away at age 40.
Similarly, it’s important not to be too conservative with investments for retirement. Because time horizons are so long early in life, the average investor can afford to take on a significant amount of risk without endangering their long-term goals. And the increased returns available from riskier investments (like small-cap equities, for example) can really add up over time.
An example might serve to illustrate these points. Imagine two people: Susan and Rachel. Susan starts investing for retirement at age 40 and takes a conservative approach, investing in a product that provides a 4% return. Rachel starts at age 25 and takes a riskier approach, investing in equities that provide an 8% return on average. They both invest $1,000 per month.
When they hit 65, Susan will have approximately $508,848. Rachel, on the other hand, will have a whopping $3,221,000. More time and better returns make a huge difference.
Cut Unnecessary Spending
Unnecessary spending is a huge drag on the financial performance of many people. By “unnecessary” we’re not referring to spending money on the finer things. There’s nothing unnecessary about spending money on things that you actually like. We’re talking about spending more than you need to obtain a good or a service, or spending money on things you don’t use or want.
For example, paying more than is necessary for cable or internet, or buying a shirt that just sits in your closet would be considered unnecessary under this definition.
Luckily, there are services available that will help cut this kind of spending from your life. Trim, Billshark, and Truebill will all assist you in reducing your service and utility bills, eliminating unused subscriptions, and cleaning up your budgets.
It’s important to be vigilant about subscriptions. It’s easy to agree to the occasional $5 monthly subscription for something you want in the moment (but you don’t really need). Over time, those little subscriptions snowball and become a significant expense.
Track Your Net Worth
A comprehensive net worth analysis is an essential component of any personal finance plan. It’s easy to calculate your net worth. Just subtract all of your liabilities from all of your assets, and see what’s left over.
The final number at which you arrive is less important than the trends you see over time. Is your net worth shrinking over time? Or even worse, is it becoming more negative? That may indicate that you have an overspending problem that you need to address.
On the other hand, if your net worth is steadily growing over time, you’re moving in the right financial direction. You can even see if you’ll have enough saved for retirement when that milestone rolls around.
Net worth analyses are important to do on a regular basis. Don’t make the mistake of doing one at the beginning of the year and considering it “done.” Ideally, you’ll want to do an analysis at least quarterly, every year.
We’ve already mentioned eliminating unnecessary spending. Minimalism is a great complement to that strategy. Minimalists make an effort to own and buy as few things as possible in order to keep their lives simple and orderly. The reduction of material possessions is said to improve wellbeing and increase happiness over time.
There are services that can help you simplify your life in this way. Sites like Decluttr will buy your unused or gently used media and tech. Not only will you get extra stuff off your hands, but you’ll also make a little money while you do it.
Live a Healthy Life
Being healthy is a key component of happiness. If you’re lucky enough to be blessed with good health, there’s no sense in wasting it by leading an unhealthy lifestyle. Not only is an unhealthy lifestyle bound to lead to poor health — It is also almost guaranteed to lead to additional medical expenses.
On the flip side, you can turn health into a moneymaker. Websites like HealthyWage will pay you to lose those extra pounds. It’s literally a win-win-win. You get healthier, make more money, and save money on healthcare costs all at the same time.
Automate Your Life
Automation is one of the not-so-secret life hacks that can turn a well-performing financial plan into an outstanding one. Technology allows people to automate all sorts of good habits and behaviors. A couple of examples of great behaviors to automate include:
- Savings account contributions
- Bill payments
These automations have several beneficial effects. First, you can avoid late payment penalties and fees on your bills. Second, you can indirectly increase your credit rating by decreasing the number of past-due payments on your credit report. Third, you can increase the amount that you’re saving and investing by putting it on autopilot.
Boost Your Low Credit Score
A low credit score can have several negative effects. It can reduce your ability to access credit when you need it, like when you’re buying a house, car, or other big-ticket items. It can increase the interest rate you pay if you are able to find credit. It can also decrease your access to some high-value financial products, like credit cards with lucrative rewards.
The first step to increasing your credit score is knowing what it is. There are a number of services you can use to get access to a current credit score. Credit Karma, Credit Sesame, and Borrowell (depending on whether you live in the US or Canada) allow you to check your credit on a regular basis.
Bonus Tip: Sharing Is Caring!
As a final tip, we want to remind you that saving isn’t equivalent to hoarding. While the former is a great habit, the latter is just greedy. Once you’re able to pay off your high-interest consumer debt, consider giving back to the community and those in need.
Charitable contributions have at least two benefits, one selfish and the other selfless. The selfish reason to give is (of course) the tax benefit. In both the US and Canada, many charitable contributions are tax-deductible. Come tax time, you’ll be glad you made those donations.
The more important reason, the selfless one, is the simple fact that giving is a good thing. It builds stronger families, communities, and nations. So, once you have your debt under control, don’t forget to give to those who could really use some help.
None of the financial goals we’ve outlined above should shatter your world. They’re not particularly groundbreaking or novel. But there’s a reason for that — They work. The best advice available borders on cliché.
Investing and paying off debt may seem like no-brainers, but bad habits can creep in and distract you from strategies that can work in your favor. If you find that you fall into that category, take a moment to educate yourself about financial best practices. You’ll be glad you did.
Get our free Personal Finance Blueprint to learn everything you need to know to build wealth.
Plus our best money tips delivered straight to your inbox.
Ricardo is an entrepreneur, investor and personal finance nerd who enjoys spending time with his family and friends, travelling and helping others achieve their financial goals. Ricardo has been quoted as a personal finance expert in several online publications, including Healthline, Bankrate, GOBankingRates, MSN Money, Yahoo Finance and USA Today.