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. Moreover, when you are merely putting money in and pulling money out of your account with no defined goal, it is easy to spend indiscriminately, making saving far more difficult. 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. So, to help you bring some clarity to your finances, here are 6 steps to define your goals and align 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? Maybe you decide it’s time to start a college fund for your little ones. Or maybe you want to save for that cross-country road trip you’ve dreamed about. Whatever your dreams may be, take the time to list them.

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. For example, it’s great if you realize that you want to reduce your debt, but improve that goal by making it Specific. You can do this by defining the credit card you will pay off. Follow this by making the goal measurable and define the period. For instance, you may want to have it paid off within the next 18 months. Next, attach a reason to the goal; which will make it relevant. For our example, let’s say you want to pay off this debt so you can finally start a college fund for your kiddo. By making some small adjustments in how you define your goals, you can turn vague ideas into concrete action items.

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. The simple fact that most of us have finite resources means that we will likely have to make some tradeoff when deciding which goals we fund.

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 longer time horizon gives you several years to recover from the stock swings. 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 the interest earned will likely not be adequate to keep up with inflation.

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.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

Published by Jose Armenta, MsBA, CFP®, ChFC®, EA

Jose Armenta is a CERTIFIED FINANCIAL PLANNER™ professional who specializes in helping federal employees get the most out of their federal benefits. Jose’s experience serving federal employees has provided him with valuable insight into federal employees' unique financial planning needs.

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