How to Set Short, Medium, and Long-Term Financial Goals

We all aspire to become financially secure. Managing our finances and planning for the future is a crucial step towards this.

It helps one decide what to do with available resources to help money beget money and grow into a sizable corpus. Hence, it shapes one’s financial decisions and influences the financial future of the investor.

But who knows what’s ahead in life for you in 20 years? Nobody. The best-prepared people have financial plans in place that may be the tailwind to their growth and are also likely to use the assistance of a professional financial advisor to implement their plans. Yes, having a stable source of income is great and gives one financial stability, but putting a part of your money to work through investments helps with meeting financial requirements as well as move ahead in life.

Setting financial goals is one way to structure your financial growth that will also help prepare you for unprecedented events. It’s important to understand that all financial goals don’t come under the same construct. For example, saving to buy a private property to be your future retirement home and saving to buy yourself a new phone next month are not alike. You don’t save in the same proportion for both of them.

Generally, financial goals are categorized as short, medium, and long-term financial goals.

What are financial goals?                                                       

Financial goals are financial targets you want to achieve in a specific time through your savings, reduced spendings, and aided by investments. For most people, financial goals serve as a medium to take control of their money.

Financial goals can be:

  • Creating an emergency fund
  • Being a millionaire under the age of 40
  • Becoming debt-free in the next five years
  • Buying a car of your own as your next big purchase
  • Sponsoring for your own college education
  • Saving for your child’s marriage
  • Retiring with an estate to your name

One should not confuse financial goals with the process of achieving them. Financial goal setting is “Making of the plan” and not “Following the plan.”

Be SMART while setting your financial goals:

Be “Specific” with your financial goals. It is not a financial goal if it goes: I’ll either buy a motorcycle costing $10,000 in a few months or buy a car costing $35,000 next year. What do you want – a bike or a car? Make a definitive goal.

Your financial goals should be “Measurable.”

How will you know when you have achieved it? For instance, saying “I want to save enough money to enjoy my retirement happily” is a vague financial goal. It would help if you quantified your goal. In this example, one needs to estimate an amount that he or she feels is sufficient to spend the retirement happily. Also, there must be some indicator to track the progress of your efforts – through the dollar amount or a percentage, etc.

Attainable: Have realistic financial goals. “I want to buy a football team” or “I want to become the richest man on earth” may not cut it, depending on your current financial situation. Know where you are starting from, and keep it real. Find out how you can achieve the goal and if you may need help from others, such as funding from friends or family, to attain it.

Relevant: Your financial goals should align with where you see yourself in the future.

For example, if you plan to spend your retirement days in Connecticut, buying a house property for retirement in Illinois may not help.

Time-bound: Put a time limit to achieving the goals – days, months, or years.

Setting smart goals go a long way in ensuring you are ready to be financially prudent to make your wishes come true. A financial plan is broken into smaller SMART financial goals – Short Term, Medium Term, and Long Term Goals – this distinction helps you pick out investment avenues that suit your requirements

Short term financial goals:

Although the time frame may vary, short-term financial goals are those you need to focus on first and foremost as they require you to spend a particular amount of money in the coming few months or years. That said, they are typically planned expenses within a 3-year time frame though it may also expand up to 5 years for implementation.

Money set aside to meet short-term financial goals should be relatively liquid and easy to access. Therefore, the choice of investment avenue should be at par. A government bond with a 10-year maturity may not make sense for a short-term investment to meet your short-term goals. Instead, while a part of the money can be held in cash, it may be prudent to invest some to enable the money to grow. Contributing to a savings account and making monthly additions to it is a great way to save for short-term goals. You can even save a portion of any extra money that comes your way in the form of bonuses, tax refunds, or maturity of any investment plan too. Short-term liquid mutual funds are another option, or even equity, if you have the risk appetite.

While short-term financial goals don’t pave the way for you to become a millionaire, you can undoubtedly save enough funds in a year to have a home renovation!

Good short-term goals might entail:

●       Having an Emergency Fund:

According to a recent survey, only 39% of Americans could pay for a $1000 emergency expense. Another survey found out that nearly 14% of Americans – that is roughly 46 million people- have already exhausted their emergency fund during the coronavirus pandemic.

People who never thought of having an emergency fund before the COVID-19 pandemic are likely to have regretted their decision. When the wave of unemployment and unexpected medical expenses struck, it became increasingly challenging to financially sustain yourself.

The very nature of an emergency fund is to meet unexpected events that might happen in the future. Targeting $500 initially and revising your target once achieved is decent enough for beginners.

As a rule of thumb: Your emergency fund should be sufficient to cover your basic needs and obligations for at least three months. And if you are married and have a family, your target should be to save enough funds to meet your family’s needs for six months.

●       Having a Budget:

  • How much are you spending?
  • What are you spending on?

You should always be in a position to answer these questions, and a budget will help you trim unwanted expenses.

A budget defines the share of income to be spent on each expense. Budgets help keep a check on overspending.

Now there are two different ways how you can prepare yourself a budget:

The traditional approach: Take out your notepad and calculator and make a list of all the possible expenses you need to provide for.

The modern approach: There are plenty of free-to-use and paid budgeting programs where you can get your budget prepared instantaneously. Some programs may compile your expenses from your bank accounts too.

A budget not only curbs overspending but gives meaningful insights into your spending patterns. There are apps to track your expenses and review at the end of the month. This provides you with a good view of your income and expenses and helps you make adjustments accordingly. 

●       Get rid of credit card debts:

Credit card debt is a two-edged sword. While you have to pay the principal amount, the interest keeps mounting up as well. The extra cost of interest that you are forced to bear blocks the cash flows you could have utilized for something important. To protect yourself from the vicious cycle of debt and interest payment, pay off your debts as quickly as possible.

Here’s a debt payback strategy you can adopt:

List out all the debts you have to repay, set aside the bare minimum installment for each debt. Now apportion any extra funds remaining to the debt with the highest rate of interest. The idea is to pay off the high-interest debt quickly.

Alternatively, you can also take the help of debt settlement companies, but that would ruin your credit ratings.

Risk appetite for short term financial goals:

When setting short-term financial goals, we prefer short-term liquidity. Thus, we should avoid risky investment options as we may not have enough time to make up for the loss if something goes wrong.

Read our article on “Understanding Your Investment Risk Profile” know more on the importance of risk profiling and to understand how risk is assessed in finance.

Saving options for short term financial goals:

  • Savings Accounts: Traditional savings accounts are safe and convenient storage of your short-term savings. However, most of them pay little interest, sometimes as low as a fraction of a percent.
  • Online Saving Accounts: They provide a higher rate of interest when compared to their traditional counterparts.
  • Certificate of Deposit (CD): Those who have a slightly longer-term view (6 months to few years) can keep their funds parked in a certificate of deposit, as they provide a higher rate of returns than saving accounts.
  • Short-term mutual funds: Those with a suitable risk profile may explore mutual funds to invest in for the short term. Direct equity investment is risky and volatile in the short term but has the potential for greater returns. Meanwhile, mutual funds give exposure to equity markets but through a fund manager whose primary job is to mitigate risk and maximize returns. This is not to say mutual funds are risk-free.

Medium-term financial goals

Your medium-term financial goal could be buying a car, or saving for your child’s education, or paying off debts. Medium-term financial goals are those expected to be achieved in 5-7 years. Medium-term saving goals serve as a link between your short and long-term financial goals.

Good medium-term financial goals may entail:

●       Getting Insurance:

Life insurance works as a lifeline for your dependents, irrespective of whether you are the only earning member of your family.

Generally, insurance premiums increase with age; therefore, the earlier, the better it is. A simple term life insurance is sufficient, it doesn’t cost too much, and in the case of any inadvertent event of death, the family gets insurance cover. The same is the case with disability insurance – the insurance agency replenishes a part of your income if you become disabled and unfit for work. Consider an insurance agent before choosing any insurance plan.

●       Paying off student loan:

Even though student loans are provided at a subsidized rate, they consume a fair share of the income of most Americans. Apportioning additional savings to pay off student loans will free up cash for your short-term intermediate and long-term financial goals. Therefore, this could be a good medium-term goal to have.

One can even consider refinancing their existing student loans. The idea here is to repay the current high-interest student loans with a new loan at a lower interest rate.

●       Chasing dreams:

We all have that ‘bucket list’ that we desire to achieve someday. It may include saving for a family vacation, saving for repair and renovation of the house, buying a bigger home at a prime destination, purchasing a brand new car, etc.

Risk appetite for medium-term saving goals

While there is no room for taking any risks in the case of short-term financial goals, the more extended target date of medium-term goals enables you to take some risks to meet the higher saving plans in the medium term.

An extended period means you have time to recover any losses you may incur due to risky investments. That still doesn’t mean that you stake your six-month savings to buy your favorite blue-chip stock, as that is a highly risky move as well.

Medium-term savings goals options

  • Current Deposits: Current deposits are the safest option available to you, but unlike short-term financial saving options, it is recommended that you do not consider short-term CDs as the shorter the period of CD, the lesser the rate of interest earned. Go for long-term CDs to avail the benefit of a higher interest rate.
  • Brokerage Account: Due to the shortage of time to recover, bonds are a safer option than stocks. Though the earning possibility is restricted, investing in bonds is considered secure.
  • Municipal bond funds: Municipal bond funds may be a good investment because earnings from them are also exempt from taxation.
  • 529 plans: If you are looking to save for your child’s higher education, then the 529 plan is for you. It’s a tax-advantaged saving program, where your money grows tax-deferred, and withdrawals are tax-exempt too.

Look for specific plans like these to allocate resources to meet your medium-term goals.


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Long-Term Financial Goals

Long-term financial goals refer to saving for 10+ years or maybe through to your post-retirement life.

According to a study, you may need up to 85% of your pre-retirement income once you retire.

Your long-term goals are mainly directed towards your retirement. How do you want to retire, and what are your retirement plans? Answers to such questions are the basis for your long-term financial planning.

Longer-term goals are generally overshadowed by the short and medium-term goals as they are not urgent. However, it is recommended that you save 10-15% of your monthly income in a retirement fund”. This is to make use of the power of compounding of money over time and to also grow a corpus large enough to combat inflation.

How to estimate your post-retirement needs?

  • Estimate your post-retirement monthly expenses. The budget you prepared in your Short term financial plan might help.
  • Estimate all the income you will be receiving at retirement. This includes your pension, money from any schemes, social security, etc.
  • The amount you need to be topped up by your long-term financial goals is your total expenses, less your total income.

In simpler terms, P= E-I

Where P is the amount to be funded by your retirement savings.

E is the total of expenses you would incur post-retirement.

I is the income you will receive post-retirement.

The four percent rule:

This rule of thumb estimates how much a retiree should withdraw from his retirement account each year. It makes provisions for steady income flows post-retirement.

The Federal Reserve Survey of Consumer Finances says an average American household has $255,200 in their retirement accounts.

Let us take an example to find out the monthly saving target of a working person.

Suppose 45-year-old Donald plans to retire in the next 15 years:

Annual living expenses post-retirement $50,000
Annual income including, pension, social security, and benefits for retirement plans $30,000
Remaining amount to be funded through long term financial savings $20,000
The total investment needed at a 4% withdrawal rate   (20000/0.04) $500,000
Current balance in retirement schemes   IRA, 401(k), 403(b) or 457 $300,000
Savings to be made in the next 15 years $200,000
Yearly savings target $200,000/15 $13,334
Monthly savings target 13,334/12 $ 1,111

Donald will be on the right track to retire if he saves $ 1,111 every month, starting now. Note that here we are assuming that his retirement accounts are full. At 45 years of age, it is likely you already have one. If you do not, it is never too late to begin. Set up a 401(k) or an IRA and start saving towards your retirement now.

Risk appetite for long-term financial goals:

With plenty of time ahead of you, you may take more risks if you have the appetite for it. One can invest aggressively in high return yielding investments like stocks or mutual funds—and shift to less risky investment options when nearing retirement.

Where to invest long-term saving funds:

  • Equity markets: The Equity market is fraught with risk. However, equity has the best risk-adjusted returns potential – the higher the risk, the higher the potential for returns. A long-term horizon means that the investment will most likely tide over the shorter-term market fluctuations.

Should cryptocurrency be part of your retirement portfolio? Read more in our article “Should you Include Bitcoin in your Retirement Portfolio?”

  • Employer-funded retirement plans such as 401(k), 403(b), where the employer may match your contribution at many organizations. Ideally, one should look to invest 10-15% of their income in these funds.
  • Individual Retirement Account: People who don’t have access to employer-sponsored retirement schemes can invest in IRAs. These schemes offer tax-deferred or tax-free growth to your retirement fund.
  • Private Equity or Hedge funds: The wealthy may explore options such as Private Equity or Hedge funds that are high-risk but high reward investments

To conclude

Goal-based financial planning defines a roadmap for you to have all bases covered.

Once your goals are in place, keep reviewing and updating your goals according to the changing scenarios. Suppose you spend a decent portion of your emergency fund to pay medical bills or other emergency expenses – look for ways to replenish it and then look to revise the target if the original one seems unlikely.

If you need to get in touch with a fiduciary financial advisor to help you with setting your financial goals or formulate a complete financial plan and create a suitable investment portfolio, get in touch with Paladin Registry. Paladin Registry’s free search tool matches you with the most suitable financial advisors for your needs, equipped to help you accumulate wealth through investing.

To learn more about the author William Hayslett view his short bio.

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