2020 was an exceptional year for all of us.
The coronavirus pandemic forced millions of us into lockdown and upended our sense of time. The November 2020 election went on for weeks in high drama. For some of us who lost our jobs, it felt like the whole world had collapsed around us.
But despite everything that happened, 2021 came rolling around, and with it came hopes for a new beginning.
The economy has now begun to slowly recover. In March 2021, the Treasury Department and Internal Revenue Service began delivering a new round of stimulus checks to tens of millions of Americans.
For many Americans, this is a chance to set financial goals for the coming year. Here’s a look at how to manage your money in a post-COVID world.
How do you set your own financial goals?
Setting your own financial goals is important because it helps you prioritize important life milestones.
You’re made to think deeply about why you want to save up money and for what purposes. This could be anything from saving up for retirement to putting aside a small budget for broadway shows. By creating clear financial goals, you also discover what success means to you.
To set your own financial goals, you have to start with a visualization exercise of where you want to be in the future. Try imagining yourself in 2 years, 5 years, or even 20 years. Do you want to have a humble yet financially secure family life? Or is your dream to travel around the world?
This visualization exercise helps you understand the amount of money you need to have saved up to become that person. It puts your savings targets into perspective. It also helps you align your values with your aspirations.
It’s helpful to go a step further here and classify each of your financial goals as wants or needs. With these useful labels, you can assign priorities to them. Sometimes your priorities may shift depending on your circumstances. The labels will help you select and pursue the goals that excite you most.
What kinds of financial goals should you set?
You should set financial goals that are categorized by their short-term, medium-term, and long-term attainability. Doing so helps you allocate your money to the right goal at the right time.
Short-term goals are those that you hope to reach within the next three months to three years. They will usually be things that require your immediate attention but are also low in budget. Achieving them will give you a confidence boost. It’ll also help you build a solid saving habit for the future.
Examples of short-term goals include paying down your credit card debt, getting a down payment on a new car, and making minor home repairs.
Medium-term goals are three to seven years away. These are goals that may be more associated with life milestones such as sending your child to college or saving up for a mortgage. They’re more difficult to achieve than short-term goals because they’re farther away in the future and therefore less visible in the immediate term.
The risk with medium-term goals is that you may spend too much of your savings on short-term goals, leaving you unprepared when important life milestones come around.
Long-term goals are savings targets, such as retirement funds, that are more than seven years away. To achieve these goals, you have to keep a consistent saving habit and invest your money in assets and high-yield savings accounts that can provide you good returns over time.
The 5 components of financial goal setting
For financial goals to be achievable, they have to contain the following components of the SMART framework. This framework prevents goals from becoming just vague notions of a future desire.
Goals have to be specific
Your goal has to state clearly what the final objective will be. The best way to determine this is to ask yourself why it’s important for you to achieve the goal. If, for example, your goal is to be free of debt, ask yourself which debt you want to pay off, why you want to get rid of it, and how much you need to pay it off completely.
They need to be measurable
Next, goals have to be easy to track. They have to include criteria or indicators that help you know that you are making progress, such as a certain amount of money that’s been saved up. Breaking down your goal into small steps or targets can help you identify the milestones you need to meet to achieve your goal.
Goals should be achievable
It’s recommended that you create financial goals that you can achieve with your income and saving habits. Setting goals that are beyond your means can cause you to feel disappointed quickly or live too frugally. Over time, negative emotions may compound and leave you feeling dejected.
They need to be realistic
It’s tempting to create big, aspirational financial goals. But doing so can make you feel overwhelmed. That’s why it’s important to review your goals and determine if they’re realistic. You can do so by asking yourself if your goals can be divided into smaller, easier to monitor goals. If the answer is yes, your initial goal was probably too big.
Goals have to be time-bound
The most achievable goals are those that have a specific date for when they need to be achieved. This is tied to the categorization exercise where you set each goal as short-term, medium-term, or long-term. Only by knowing when you want to reach the goal can you work backward and develop a monthly savings plan.
A guide to setting financial goals in 2021
Setting financial goals in 2021 requires a review of how COVID-19 has impacted your finances. The guide below lays out the six key steps to focus on to build post-COVID financial security.
Look at your current financial situation
COVID-19 has affected each one of us differently. While some of us lost our jobs, others were able to keep theirs and build up a considerable amount of savings. Knowing where you stand financially is important to creating attainable and realistic financial goals.
To do so, start by assessing your income, budget, and net worth. You can figure out your net worth by summing up every asset you own (i.e., your car, the money in your savings account) and subtracting everything you have that’s a debt (i.e., student loans, credit card debt) from that amount.
The number you get is a snapshot of your current financial health.
Figure out how COVID-19 affected your finances
Once you’ve evaluated your net worth, it’s time to understand the impact of COVID-19 on your finances.
Look at how the pandemic affected your income. Did it rise or fall? A lower income may reduce the amount of money you can allocate to your financial goals.
Also, determine the value of your savings. According to the Federal Deposit Insurance Corporation (FDIC), the economic effects of the pandemic led to a significant drop in the average savings interest rate to just 0.05% APY or less at several large banks.
Be SMART about your post-COVID spending
Many financial analysts predict that there could be a boom in spending after the COVID pandemic is over. People who saved up during lockdown may be feeling eager to splash out on a vacation or visit entertainment venues with friends.
It’s important to be aware of these trends as you could get easily swept up in the spending frenzy. Whatever your financial health status, keep sight of your SMART financial goals and adapt accordingly. Make sure that your post-COVID spending has a monetary and time limit and is done for specific purposes.
Build a budget from your financial goals
To protect yourself from overspending, build a budget that’s aligned with your financial goals. Take into account any changes in your income, stimulus payments you’ve received, and the rising cost of food and utilities. A good budget should help you pay for all of your monthly expenses and leave enough money for you to set aside for your financial goals.
If you’re just starting with your financial goals, the 50/30/20 budgeting can help you ease into saving. You allocate 50% of your income toward essential expenses, 30% toward personal indulgences, and 20% toward savings and debt payments.
Stick to it
To make any budget work, you have to stick to it. You need to constantly monitor your progress toward achieving your goals. If there are changes in your income, you’ll probably need to adjust your budget and financial goals as necessary.
By reviewing your budget and goals every two to three months, you’ll be able to see how realistic your goals are. You’ll also be able to log small wins each time you achieve a small milestone.
It may also be helpful for you to sleep on big purchases to stop yourself from impulse purchases that could derail your budget. Automatic bank drafts can help you automatically allocate your money to a savings fund each time you receive your income.
Treat yourself from time to time
Working toward your financial goals doesn’t always have to be about saving money. Make sure to set aside some money to reward yourself each time you reach a milestone. It could be something small such as a nice restaurant meal with your spouse or a short family vacation.
With an online financial platform like Aspiration, you can manage these rewards and your finances easily. Aspiration offers high-yield savings accounts with up to 1.00% APY that can be accessed anywhere and at any time through our website and mobile applications.
Customers can withdraw their money for free at more than 55,000 Allpoint ATMs across the United States. Plus, Aspiration lets customers decide how much they want to pay for our cash management services, even if it’s zero.
Try Aspiration today to build a secure and healthy financial future.