In school, our personal goals can change how we follow advice. For example, I didn’t care about making an A in music appreciation, so I didn’t study.
The same applies to personal finance. Our personal goals will change what rules we follow.
The basic rules of personal finance are to save money, avoid debt and invest for growth. Most advice on personal finance has to do with the science behind finance — yearly investment returns and proper insurance coverage. However, we often overlook the “personal” in personal finance.
While following the rules of finance will put you on the path to financial security, your behavior and attitude about money are just as important. If you’re like most people who dedicate themselves to personal finance, you think of your habits in two ways — spending and saving. Even more so, we categorize spending as bad and saving as good.
This trap is easy to fall into and eventually prompts you to save money for the sake of saving money. In reality, money is a tool for achieving your short- and long-term goals and not something to be saved until it’s necessary to use. Thinking of money as a tool makes planning significantly easier.
Let’s use the issue of retirement as an example. Most resources on retirement will tell you the same thing — max out your employee-sponsored savings plan and save a certain percentage of your salary based on your age.
This formulaic approach arbitrarily builds your retirement savings account because you have not set your specific retirement needs. While this is better than no plan at all, you may be ineffectively utilizing those hard-earned dollars.
Now, let’s shift our mindset to money as a tool to achieve our goals in life.
Most people want to travel when they retire. Let’s say you want to buy an RV and go on a cross-country trip for a year. Assigning a dollar value to the expense of your future trip is easy. Now we have a specific goal to work toward, whereas before we were vaguely saving money for travel expenses.
After clearly defining our goals, we may find that we’ve been saving too much money and some of our paycheck could be better spent in short-term enjoyment, like going out to eat more often.
Before you make a budget, sit down and write out your short- and long-term goals. Figure out the financial impact of your goals. This will serve as the base for your personal financial plan.
An effective financial goal can be described three ways — achievable, specific and measurable. A few examples include paying off a $30,000 house down payment in three years, paying off credit card debt in six months and saving $4,000 for a vacation next year.
These goals are much more effective than the standard, “have $1 million by retirement,” or, “live debt free.” Having a budget and financial plan based on your comprehensive list of goals eliminates the “saving good, spending bad” mentality. If you know you are on track to meet your goals, then spending money here and there can be guilt-free.
The basic rules of personal finance will always be the same, no matter if you learn them on the Internet or at a fancy seminar. But only you can define the goals you want to achieve.
Jay is a 21-year-old finance senior from St. Simons Island, Georgia.