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Money Management - Head Matters


6. Step 1: Goals

Needs and wants should be considered financial goals, but only after they become financial plans that include costs and timelines for achievement. There are different types of goals—short, medium, and long term. It is important to know that, just because a goal is short-term doesn’t mean that it should be accomplished first.  As with any goals, you should always consider both urgency (how soon it has to be done) and importance (how significant it is) of the goal.  Saving for retirement, for example, is an important goal and requires your realistic attention even if retirement is not immediate. 

Short-term goals
are things you can accomplish in a few months—buying a leather coat or a surround-sound system, for example.

Medium-term goals
take a few years to accomplish, such as saving for a car or saving for college.

Long-term goals take many years, such as buying a house or retiring early.

To set realistic goals, Henry will need to estimate how much each item will cost and how much he needs to save per month. Henry adds three columns to his list to find out the total cost of his wish list, the time frame for achieving it, and how much he needs to save monthly if he really wants to achieve those goals. Have you noticed how often we suggest that writing down thoughts helps us think about options? In contrast, you lose control over your personal finances if you avoid writing down financial plans. Basically, if you want financial options you must have control over your finances and one of the best ways to do this is a written plan.

Below is an example of a needs and wants timeframe plan.

My Needs and Wants Need or Want? Priority Importance?
1=gotta have
2=really want
3=would be nice
Time Frame in Months
Short=a few
Total Cost Monthly Cost
Buy a leather coat  W  3  12 months  $200  $17
Buy a sound system  W  3  12 months  $1,200  $100
Save for first year of college  N  1  18 months  $4,800  $267
Save for a better car (after trade in)  W  2  24 months  $10,000  $417
Save for a better apartment to rent (per month)  W  3  12 months  $600  $50
Save 10% down for a $200,000 house  N  3  60 months  $20,000  $333
Pay off credit cards  N  1  12 months  $2,400  $200
Total needed to save per month:          $1,384

Notice that, even for short-term goals, 12 months was entered as the length of time for savings. While Henry may buy a leather jacket within two months, for budgeting purposes, we will show an average cost per month over the full year. The reason we do this is to help you compare your goals over a year and to help you start thinking more long term.

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Before Henry decides which of these new financial goals he can afford, he needs to get a complete handle on how much he has in current income and expenses.
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