If one moves confidently in the direction of his dreams, and endeavours to live the life which he has imagined, he will meet with a success unexpected in common hours. — Henry David Thoreau

What would you do if money were not a concern? Would you quit your job? Would you travel? Would you live in another state? Another country? Would you write? Would you garden? Would you devote your life to charity? Would you race cars? Would you enter politics?

Many people make poor financial decisions because they don’t have long-term personal goals. If you don’t understand that buying a new cell phone or playing a game of poker takes money from a larger goal — a new home, a new car, a vacation to Europe — then there’s no incentive not to use the money for whatever seems fun at the moment.

Setting goals is easy. Grab a piece of paper and a pencil. Make four columns and label them “long-term”, “intermediate”, “short-term”, and “immediate”, respectively.

Long-Term Goals
Imagine that money isn’t an issue. Where do you see yourself in ten or twenty years? Where are you living? What are you doing? If you could do anything in the world full-time, what would it be? Consider these questions for five minutes. Let your mind wander. Let your imagination pull you where it will. Do you see yourself as a writer? Are you a pilot? Do you have a cabin in the hills?

When you find yourself considering something that seems like an extension of your self, something you truly want to do, write it in the “long-term” column.

When I do this exercise, I always have the same vision: I’m a writer, sitting at home in front of a big oak desk. I’m making my living by writing. That’s my long-term goal: to be able to stay at home and write. But how can I afford to do so?

Intermediate Goals
After you’ve developed a couple long-term goals, ask yourself: what would it take for me to reach them? Would you have to quit your job? Would your family have to move? Would you need to go back to school? Would you need to save a sum of money?

In order for me to write full-time, several things have to happen. First, I need to hone my craft. I need to practice. I also need to become better educated. I might do this through reading or by taking classes on evenings or weekends. Ultimately, if I want to be a writer, I’ll need to quit my current job. But to do so, I need to have saved a nest egg that can support me as I make the transition to writing full time.

Look at your long-term goals. What steps do you need to take in order to reach them? What do you need to make happen in the next three to five years? Jot these actions in the “intermediate goals” column.

Short-Term Goals
Now that you’ve established some long-term goals, and have some idea of what intermediate steps are necessary to reach them, spend time considering what you can do in the next year to start the journey toward them. If your long-term goal is to be running a successful dune buggy business in ten years, what steps do you first need take? These first steps are your short-term goals.

Though you set your long-term goals by ignoring money, money is key to establishing short-term goals. Intermediate and long-term goals are most easily achieved if a solid financial foundation is set early. If your long-term goal is to live in another country, your short-term goals will likely involve eliminating debt, building equity in your current home, and investing for growth.

In order to pursue my goal to become a writer, I need to:

  • Eliminate all debt (March 2008!)
  • Make investing a habit
  • Strengthen my emergency fund
  • Save enough to be able to quit my job and go back to school

Immediate Goals
The final question to ask is: “What can I do now in order to help me achieve my long-term goals?”

This may be the the most difficult question to answer. How can anything you do today possibly affect your long-term goals? And yet the truth is everything you do today affects your pursuit of these goals.

Every time I choose to buy comic books instead of putting the money toward my home equity loan, I’m tacitly agreeing to put off my long-term goal just a little longer. Every time I go out to a fancy dinner, I’m adding an extra day (or two, or three) to the time it will take to achieve my dreams.

I’m not saying that you should forego all pleasure now in order to obtain future rewards. But, as Dave Ramsey is fond of saying, “If you will live like no one else, later you can live like no one else.”

The best way to make sense of short-term personal finance decisions is to have a clear long-term objective. If all you want to do is hang around town, work 9-5, and hang out with your buddies — there’s nothing wrong with this goal — then you probably don’t need to change much. But if your dreams are bigger, then you need to align your spending with your goals.

This article is about Choices, Planning