6 Steps To Define Your Money’s Purpose

As important as money is in our lives, many still find it difficult to be intentional with their money and often find that money drives their lives instead of supporting the life they want to live. When you are merely putting money in and pulling money out of your account with no defined goal, it is easy to spend indiscriminately. Having defined goals helps keep you accountable, gives you awareness of your financial situation, and may motivate you to save more to accomplish your goals. The following 6 steps can help you define your goals and aligning your money to support the life you want.

Step 1: Define Your Goals

Goal setting is critical to achieving the life you envision, so take the time, to be honest with yourself. Grab a beer or a cup of coffee and sit back and dream. Ask yourself what matters to you most? Do you want to spend more time with your kids? Do you want financial freedom? Or maybe you want to start a college fund for your kids and take a cross-country road trip.

Your goals will likely be many and varied; that’s ok, just dream big and write it down.

Step 2: Be SMART

Now that you have a rough outline of your goals make sure they are SMART. Which means they are specific, measurable, achievable, relevant, and time-bound. Recognizing that you want to reduce your debt is a great start. But improve that goal by defining the credit card you will pay off (specific, measurable, achievable), followed by the period, next 18 months (time-bound), and the reason, maybe you want to start a college fund for your child (relevant). Having a SMART goal turns vague ideas into concrete action items. Knowing the size and scale of each of your goals will significantly improve your probability of success.

Step 3: Prioritize

Once you have your SMART goals, the next step is to rank each of your goals according to importance. This will come in handy when you have to add up each goal’s cost and compare it with the money available because it’s likely that you can’t fund all your goals at once.

Step 4: Take Stock of What You Have

After you have your goals prioritized, review your current financial situation, and create a realistic budget. Once you know what your budget looks like, determine how much money you need to save to reach each goal, this doesn’t have to be an exact amount but try to establish a reasonable estimate.

Most of us will not be able to fund all of our goals simultaneously, so you will likely need to make some tradeoffs in your budget.

Note: An emergency can set you back significantly in your savings goals, so ensure you have an emergency fund.

Step 5: Select a Saving/Investment Vehicle

Now, it’s time to decide where you should put your money. Here are a few critical factors to consider:

  1. Time Horizon – When do you need the money for your goal? The saving/investing option you select should match the time horizon for the goal the money is meant to support. Therefore, you should separate your goals into three categories: long-term (10+ years), intermediate-term (3-10 years), and short-term goals (less than 3 years). The reason is that each time frame will have options that are most appropriate for it. For example, stocks are generally best suited for long or intermediate-term goals, such as retirement or paying for college, because the time horizon gives you several years to recover from the stock market’s ups and downs. Hence, stocks are generally not suitable for short-term goals because they can be very volatile in the short-term with insufficient time to recoup losses. Whereas savings accounts, money market accounts, and CDs provide the safety and liquidity usually required for short-term goals, such as: purchasing a car or saving for a vacation.
  2. Risk Tolerance – How comfortable are you with taking risks? Do you lose sleep every time your TSP declines in value? If so, you may have a low tolerance for risk. Having a low tolerance for risk doesn’t necessarily mean you should only put your money in a savings account. But it could mean that you should seek the assistance of a qualified financial planner to help you develop a saving/investing strategy that you understand and are comfortable with.
  3. Risk CapacityHow much risk can you afford to take? Suppose your goal is to build an emergency fund. In that case, you may consider the job security of being a Federal employee (keeping in mind potential government shutdowns) and may decide that you can afford to save three months’ worth of expenses instead of six.
  4. Rate of Return – How much are you hoping to make with this money? Any strategy you choose to implement will consist of tradeoffs between safety and rate of return. For instance, putting money into a savings account will keep your money safe; but your money will likely not grow as fast as inflation and therefore lose its buying power.

When deciding where to put your cash, understand the tradeoffs between risk and return.

Note: As your goals move from long-term to intermediate or short-term, ensure that you gradually move them to an appropriate vehicle.

Step 6: Monitor and Adjust as Life Happens

Our goals often become moving targets, with our plans hitting roadblocks along the way. Therefore, you should review your strategy to ensure you are hitting your desired benchmarks at least once a year or if there are any major life events, such as unexpected money, divorce, or pregnancy. If you have to make significant changes to your plan, that’s ok; the process of financial planning is continuous, and your plans will have to adapt as life happens.

Final Thoughts

Following through on your goals will not only lead to great money habits, but it will ensure that your money supports the life you want to live. If you need help defining your goals, or aren’t comfortable selecting a strategy to help you reach your goals, consult with a qualified financial planner.

Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Hi, I’m Jose Armenta, a Certified Financial Planner practitioner. For over 14 years, I have worked with or among federal employees, from serving in the Marine Corps to my stint as a police dispatcher and now as a financial planner specializing in helping FERS federal employees. In that time, I have spoken to hundreds of federal employees about their benefits and retirement. Helping federal employees maximize their benefits, reduce taxes, and live confidently is a passion of mine. When I am not perfecting financial plans, you’ll find me at the shooting range, playing the drums, or breaching blanket forts with my three little ones.