Financial success is key to better living, but better living can mean different things for each person. While one person is looking to save for a down payment on a house, another can be looking to put away funds towards a vacation, and another can be looking to purchase the latest video game console. These different goals vary in timeline and affordability, and thus require different mindsets. We'll be separating financial goals into 2 categories: short-term and long-term goals.
Defining Short-Term Goals
Short-term goals are typically achievable within a year and have relatively set capital requirements. Examples include building an emergency fund, paying off credit card debt, or saving for a specific purchase like a vacation or a car. Say you make $5000/month post-tax, and you spend $3000/month on basic living expenses such as rent, utilities, insurance, food, and transportation. If you stick to your budget, you’re able to put away $2000/month. To build an emergency fund for 6 months of living expenses you’d need about $12,000, which would require 6 months of saving. If you wanted to go to Greece for a vacation, which would cost on average $2000-$3000 total, you’d need 1-2 months of saving. Or maybe you're looking to remodel your bathroom, and it'll cost $4000 to do so. If you do the math, it works out to about 2 months of saving. Also, if you're mostly gunning for short-term goals, you could briefly tighten your budget by cutting down or out non-essential spending to expedite the saving process. Think Netflix, snacks, or new clothes. But these would be harder to cut out for the time needed for a long-term goal. In summary, short-term goals are well-defined and, relatively-speaking, quickly accomplishable.
Defining Long-Term Goals
In contrast, long-term goals tend to have more nebulous capital requirements and longer timelines. Extending beyond immediate gratification, long-term goals encompass milestones like homeownership, funding education, and achieving financial independence. While there are estimated capital requirements and timelines, these can vary wildly depending on each person’s situation and needs. Let’s use homeownership for this example. Buying a 1750 sq foot home in Dallas, valued at approximately $300,000, will require a $60,000 down payment. Whereas buying a 650 sq ft apartment in San Francisco would also be valued at $300,000, requiring the same downpayment. Financially, they’re the same and would require the same timeline to achieve the capital requirement, but you’re getting very different cities and very different living situations. Let’s say that moving to Dallas isn’t an option as all your friends and family are in San Francisco, but you also can’t raise a family with 2 growing children in a 650 sq ft apartment. You need a bigger house. A 1750 sq ft apartment in San Francisco is currently valued at approximately $1 million, which requires a $200,000 down payment. That’s a huge difference in capital requirement compared to the $60,000 down payment for the home in Dallas, and will require a longer timeline of commitment to fulfill. Let's return to our previous salary example and assume you net $2000/month that you can freely spend. It'd be folly to assume that $2000/month will remain consistent over the timeline needed to buy these houses. If you need a $60,000 down payment, you'd need to save for 30 months or just under 3 years. A lot can happen in 3 years, whether it be losing your job, getting a higher paying one, medical bills, or even winning the lottery, and requires more planning and flexibility when compared to a short-term goal.
Conclusion
To put it simply, short-term goals require less planning and flexibility when compared to long-term goals. You could also put it as it's easier to anticipate what the next 3 months look like than what the next 3 years do. Thus, while a delay of 1-month or 3-months might feel like a major delay for a short-term goal, it's likely only a fraction of the time needed for a long-term goal. Sometimes the longer term goals take a backseat to fulfill short-term goals, and sometimes the long-term goals are more important so you cut out some or all of your short-term goals. Whatever decision you make, just remember that only you can decide what is the right goal to work towards.