There are a few benefits to setting up short-term financial goals. First, it encourages you to save some cash, whether that involves turning on the fan instead of the air conditioner or cutting down on visits to Starbucks.
Second, it forces you to see the big picture: What does your overall financial situation look like? As part of our Money Management Tip series, we'll take a deeper look into how establishing short-term financial goals benefits you.
"A short-term financial goal could be anything from saving up for a holiday vacation to buying a piece of furniture."
Understanding your short-term financial goal
A short-term financial goal could be anything from saving up for a holiday vacation to buying a piece of furniture. They're relatively large expenses that require a strong level of commitment on your end.
For example, taking a week off in Costa Rica isn't cheap. You not only have to save for the flights and hotel, but also consider the cost of going on daily excursions like jungle hikes or deep-sea fishing. The point here is to ensure you fully understand what the vacation as a whole is going to cost you.
The same principle applies to purchasing something like a new computer. The PC itself is one thing, but you also have to pay for any software you may want and any warranty plans that may catch your eye. Once you do this, you'll be able to find out exactly how much you need to save.
Tips for saving money
Once you establish your financial goal, you can take a look at your bank statement and identify nonessential expenses: mid-morning coffee runs, take-out lunches, weekend drinks and the like.
Maybe you can forego the $4 coffees every morning. If you do that, you'll save $80 a month or $960 per year! At first glance, skipping trips to the coffee shop may seem like it doesn't have a big impact, but over the long run, it's a wise decision.
Another option is to start using coupons. Think about all of the promotional emails you get over the course of the week. A lot of those emails contain discounts for certain items. Sure, these messages are encouraging you to buy, but the key is not to use those coupons until you actually have to buy something you need.
"Research has shown consumers spend more wisely when they think about the future."
Financial goals promote good behavior
There's actually another benefit to saving money: It gets you in the habit of being a conservative spender.
In a study published in the Journal of Consumer Research, authors Daniel Bartels and Oleg Urminsky of the University of Chicago Booth School of Business found that when customers think about future financial consequences, they not only spend less, but also spend more wisely. Essentially, consumers chose to buy items that were critical to their livelihood.
Overall, the researchers' conclusions make sense: If nothing's compelling you to save money, you're probably not going to think so much about cutting down on expenses.
Also, keep in mind that a financial goal doesn't have to be related to a semi-big expense. For instance, if you want to have another $2,000 in your back account by this time next year, start building up a savings plan.