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We’re not yet too far into 2018 to set resolutions. And one that’s often overlooked is arguably one of the most important — setting realistic financial goals.
Indeed, if you’re looking to get your spending and financial house in order this year, you can still make it happen. That’s especially true if you follow the advice of our expert guest, Abed G. Rabbani.
We had the chance to sit down and chat about financial planning with Rabbani, assistant professor in the Department of Financial Planning at the University of Missouri. Rabbani is a Certified Financial Planner and holds a doctorate of philosophy from the Department of Financial Planning, Housing and Consumer Economics from the University of George.
Here’s our Q&A with Abed G. Rabbani about setting realistic financial goals:
Q: What should one consider when setting financial goals for the year ahead?
A: Any financial goal should be a “SMART” goal. SMART is an acronym for “Specific, Measurable, Actionable, Realistic, and Time-Bound.”
In other words, when you are setting a financial goal, you should check if your goal has a definite outcome and deadline, and is within reach, based on your personal income and expenses, and asset and liabilities.
Q: How much of one’s income should be allocated to achieving their financial goals?
A: To decide on the amount of your income that should be allocated, break down your budget using the 50/20/30 rule. No more than 50% of your income should go toward necessities — housing, utility bills, transportation and food. The next 20% should then go toward funding your financial goals — for example, your emergency fund, paying off debt, etc. Finally, 30% can be allocated to your lifestyle choice or your wants — for example, eating out, entertainment, hobbies, shopping, etc.
The important point to note here is that the order must be maintained. You contribute to your financial goals after you pay your necessities, but before you spend to satisfy your lifestyle choices.
Q: What methods are best recommended to make sure one sticks to their savings plan?
A: I strongly recommend automate your savings as soon as you get paid. Automated savings will save you from making same decisions every month to transfer money to your savings accounts, which can be mentally taxing. Save as soon as you receive your paycheck. If you wait until the end of the month, there is a higher likelihood that you will not have much left to save.
I also recommend having a number of savings accounts opened for various goals. When you see your savings grow for each goal, you are more likely to keep it there and stick to your savings plan.
Q: What other advice would you give when setting realistic financial goals?
A: When you are setting up or working on financial goals, make establishing an emergency fund the highest priority. Without setting up an emergency fund your other financial goals are not realistic and subject to vulnerabilities. Because if you do not have an emergency fund to fall back on when unexpected things happen, your funding of other financial goals is most likely to be on the chopping block.
Fund your emergency fund with approximately three months of living expenses, or any amount that you are comfortable with. You must use the emergency fund money strictly for real emergencies — for example, emergency room visits, car repair, unexpected home repair, etc.
We’d like to extend our sincerest thanks to Abed G. Rabbani for taking the time to speak with us. We appreciate your valuable insights.