Setting your Financial Goals
Setting financial goals is important to help you outline what you want to achieve. It is a crucial step in your planning and budgeting journey.
What financial goals are the most important to you? Write them down then take a break and come back to it 24 hours later, or even several days. Setting your goals today does not mean you cannot change your goals in the future. Your life circumstances may change. You may realize what you once prioritized is now less important allowing you to shift your focus to another goal. Take as much time as you need to decide what goals are important to you. Explain to yourself why the goals you have written down are important, it should be an easy explanation if you value achieving that goal.
I like to revisit my goals once every 3 months, not because I change them every 3 months but to consistently remind myself of what it is I am trying to achieve. Revisiting your goals will reinforce your actions as you progress. If your goals have changed, try and figure out why and go through your thought process. Your goals should excite you. Imagine yourself having achieved the goals you have written down, you should be able to imagine a sense of pride, independence, and accomplishment.
Examples of financial goals;
- Taking control of your finances by educating yourself on your current situation (understanding your Financial Report Card)
- Creating a monthly budget and sticking to it
- Getting a promotion or changing jobs (increasing your income is one of the best changes you can make to improve your finances)
- Paying off your debts (credit card, car payment, student loan, etc.)
- Saving an emergency fund (3 months’ expenses is a general rule of thumb)
- Diversifying your income (dividends, rental income, bonds, etc)
- Saving for college
- Saving for a house
- Becoming mortgage free if you already own a house
- Saving for your child’s education
- Saving for a family holiday
- Achieving Financial independance
The list could go on, you decide which goals are important to you. Everyone is in a different situation – there is no one size fits all answer. What works for you might not work for your friend or neighbor. Financial goals depend largely on the stage of life you are in. We all live different lifestyles and achieve milestones at different times. This is why you need to sit down and be honest with yourself about WHAT you want in life and WHEN you want it. I have always liked the quote “You can have it all in life, you just can’t have it all right now”. Good things take time. With the right planning and discipline, you will be able to achieve your goals.
Your Financial Report Card will not only tell you where you stand financially but also help you prioritize your goals and assess your progress. For example – Johnny has two goals – (1) to pay off his credit card debt and (2) to save $20,000 for a down payment on a house. Johnny’s credit card debt of $10,000 is incurring interest at an extremely high rate of 24% per annum. If Johnny didn’t prioritize paying down his debt, he would incur $200 in interest each month ($10,000 x 24% / 12 months). If he made no payments on his debt for a 1 full year, then by the end of that year his outstanding balance would have grown from $10,000 to $12,400.
Not only is Johnny incurring painfully high interest costs, but he is also hurting his credit score. This is decreasing his chances in getting approved for a mortgage. The point being made here is that you need to prioritize your goals to ensure you are benefiting yourself as much as you can. A general rule of thumb in personal finance is that one should prioritize paying off their debts if they are incurring interest at a rate higher than 6%. There are some exceptions, and speaking to a certified financial planner if you are unsure of what is best for your situation is a great action to take. I am personally even more conservative on this topic and believe the emotional benefit of being debt free outweighs any financial upside of investing while still having debt. At the end of the day, you need to be comfortable with the plan of action proposed.
Now the above is an extreme example, deciding which goals you should work towards is not always an easy decision. Contemplating how much to contribute to your pension, save for a house, or pay off student loans can be a difficult juggling act. This is why writing down your goals is an important task. I find writing goals down on paper helps me clarify my intentions. You may have heard that people who write down their goals are 1.2 to 1.4 times more likely to achieve them. Writing your goals down initiates an “encoding process” in your brain, increasing the chances of memory thus increasing the likelihood of engaging in behavior to complete that goal.
You may realize that some of your goals are short-term (less than 1 year), medium-term (1-5 years), and long-term (5+ years). Life is a marathon, not a sprint. Bucketing your goals into short/medium/long-term goals may help you set your expectations. I firmly believe you cannot achieve great things in life without hard work and determination. Financial goals are the same. If you build yourself a plan and commit to carrying that plan out, then you are setting yourself up for success.
I like to set milestones for my goals because I think it increases my chances of staying on track and I like to see my progress throughout. I also like to set a timeline for when I want to achieve that goal. One trick to breaking down significant or long-term goals is to “Halve your Goals“. For example, if you have a goal of saving $50,000 in 2 years, you can break down that goal into smaller chunks again and again. By the halfway point, 1 year, you should have saved $25,000. By 6 months, $12,500. By 3 months, $6,250. At 1 month, $2,083.
Breaking down goals into periods of a single month will help you get an understanding of how reasonable this goal is considering your current monthly budget. You will have a limited amount of funds that you can contribute to “savings”. Can your monthly savings budget sustain contributing the required monthly amount needed to achieve your goal? If not, revisit the timeline as you may need to allow yourself more time to achieve that goal.
Life happens and budgets are not always perfect, so creating a tracking schedule will keep you accountable to show you your progress in real-time. I cannot stress enough how beneficial this process is. You confront your progress every month. You will feel good if you are staying on track or if you are ahead of schedule. If you find yourself falling behind, you can find out why and hopefully find the root of the cause and get back on track.
Financial goals do not have to be large milestones or huge accomplishments. You could have a goal that is as simple as buying yourself a new bike for $500. Apply the same logic as the above example. Have you written down your goal? When do you want to achieve this goal? How much of your “monthly savings” budget can you contribute to this goal, whilst keeping your other financial goals in mind? Have you created a tracking schedule to keep yourself accountable?
If you carry out the above methods to your financial goals, you will have a much higher chance of achieving or even surpassing your goals. Get started on writing those goals down!