What Are Financial Goals
Financial goals are the personal financial targets and objectives for how much money you want to earn, spend and save for a particular purpose. Planning what you want ahead of time is an essential step so you align your actions towards your long term ambitions, including short term milestones to keep you on track.
Examples of Financial Goals
- Paying off all high-interest debt
- Becoming debt-free
- Saving for retirement
- Saving a deposit to buy a home
- Saving for a specific purchase, eg a holiday or car.
- Achieving financial security
- Building an emergency fund
- Starting a business or side project
- Improve your credit score
Why is Setting Financial Goals Important?
Defining what you want and planning accordingly are essential steps to achieve what you want in life. You can then effectively follow a roadmap so you can stay focused and give you the motivation to stay on the right path.
Many people are looking for financial goals that you should achieve by certain ages or decades such as in their 20s, 30s, 40s and 50s. This is also true for people looking for goals they should achieve at certain stages in life such as financial goals for students, young adults, couples and retirees.
As you will find I’ve not defined specific age ranges within this post and for good reason. This is because everyone is different and what is right for one person may not be for someone else.
My aim is to give you the strategies and the knowledge for you to understand how you should set goals, then you can choose the ones that are right for you and make the biggest impact in your life.
How Do You Write a Financial Goal?
First, you need to define exactly what you want to achieve long term and then work backwards with mid-term and short term goals that align with that outcome. To do this, you need to decide what matters to you, and how managing your money more effectively can help you reach that desired situation.
For example, your long term goal could be to retire in 15 years with enough income for a specific standard of living.
I do realise I’m being quite high level and generic here and I will go into more detail below, although I’m hoping this example can relate to most people.
Many strategies will allow you to achieve this outcome, although choosing which combination of short and mid-term goals that are right for you to achieve this long term target is essential.
To achieve that level of income in retirement, you will need to have a large sum of money saved that you can draw down and earn from for years to come.
To build that sum of money, you will need to save a certain amount each year for it to be achievable. This can be done through several different methods, although most commonly by saving a certain percentage of your income.
The percentage required may or may not be achievable depending on each person’s current circumstances. This long term goal can then be used as a way to set smaller short and mid-term goals that will allow you to hit that long term target.
This can include setting a budget to reduce your spending habits, getting an increase in salary through a promotion or new job and starting a business or side project. All of these could allow you to save more of a percentage of your income each month. As you can imagine, this isn’t an extensive list, although I’m hoping you can see how defining the long term goal first can help you plan how you’re going to achieve it.
You also need to ensure each goal is SMART, which I’ll explain more about below.
How Do You Set SMART Financial Goals?
SMART stands for Specific, Measurable, Action-oriented, Realistic & Time-bound. Setting your goals up in this way will help give you the best possible chance of achieving your desired outcome. It will also push you to define and focus on exactly what you want, instead of just high-level generic wishes.
S = Specific
Being specific when setting your goals will ensure you have a defined target and something you can focus on. Many people set goals that are very generic, such as I want to get rich or I want to retire early.
With generic goals, it becomes very difficult to plan the steps needed to make your goal become reality and also to conjure the motivation to stay dedicated for the long term.
To help make your goal more specific, think through each of the bullet point below in relation to your goal. Remember, the more specific the better, thinking in this way may even drastically change your goal.
- Who – Who is involved?
- What – What do you want to accomplish?
- When – Establish a time frame.
- Where – Is there a specific location or area?
- How – A goal without a plan is just a wish!
- Why? Define the specific purpose and benefits of achieving the goal.
M = Measurable
Making sure your goal is measurable is a key step to ensure you actually know how you can achieve your goal. Quantifying your goal is the easiest way to do this and makes your goal a lot more tangible.
As financial goals usually have some sort of monetary element, quantifying it is usually a lot easier when compared to other types of goal setting. For example, this can be an earnings target, savings target or getting your credit score past a specific number.
A = Action-oriented
In order to prevent becoming overwhelmed with a goal, making sure it is broken down into actionable steps will help give you something clear you can work on now.
This is why setting short terms goals that align to a long term goal and vision is an excellent way to always know what you can do now to move closer towards your desired outcome.
I’m all for setting big life-changing goals and wholeheartedly recommend doing so. However, if that goal is so big you don’t know where to start you aren’t going to take any actions that move you closer to achieving it.
You can also break the short term goal into daily, weekly and monthly actionable steps and smaller goals so you know exactly what you need to do. This will also have the desired effect of keeping you motivated, especially when you start to see progress.
For example, your long term goal could be to buy a house. In order to do this you may need to save £30,000 over the next 3 years. Breaking this down, you will need to save £10,000 each year, equating to £833 each month.
Now you have this smaller, more digestible £833 per month figure, it allows you to define action-orientated steps you can make to achieve it. For this particular goal, there are a number of actions you can take to give you the ability to save the extra money each month. Below are some ideas, although isn’t an extensive list.
- Review your spending habits and reduce unnecessary spending.
- Negotiate your bills such as car insurance, mobile contracts, utilities etc. (Comparison sites are excellent to help with this!)
- Push for a promotion or new job to increase your income.
- Increase the return on your cash, such as a higher interest rate bank account. (eg Marcus by Goldman Sachs @ 1.2%, every little helps!)
- Earn some passive income to supplement your savings.
Then once you get to the magical £833 number, just sticking to this plan alone will ensure you’ll have your house deposit within 3 years.
Remember 1 long term goal, can have multiple short term goals and actionable steps that can contribute towards it.
R = Realistic – How do you set realistic financial goals?
Make sure that you avoid setting completely unrealistic goals, especially in the short term. The biggest draw-back of huge goals for many people is that they’re so big that it’s hard to know where to start. This then usually leads to people not doing anything and not making any progress at all.
When setting financial goals, it’s important to be ambitious, although you need to make the goal relevant to you and give you the ability to set a clear plan to move forward.
There have been several studies conducted on goal setting and the results are quite surprising and don’t align with what many people think.
The results show that the problem isn’t setting high and ambitious goals and missing them, it’s setting low attainable goals and achieving them. Many people think if they set low goals that are easy to achieve they’ll avoid future disappointment.
Although the studies show that when people set small goals, they subconsciously lower their expectations of themselves, reducing their motivation and drive, even when successful.
For those interested, here’s a link to one of the studies.
The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.~ Michelangelo
The key is to set the biggest long term goals that you are able to set a clear actionable plan for. Then even if you fall short, you’ll more than likely be in a better place financially and mentally, allowing you to continue to strive forward.
Armed with this knowledge will hopefully give you the desire to dream big and strive for greatness.
T = Time bound
Defining a specific end time for your goals will give you a deadline to work towards and a way to measure your progress.
Open-ended goals, especially financial, without a defined time frame are practically impossible to set a plan for and just end up becoming an afterthought. This leads to a lack of focus and can reduce your motivation and drive to make progress.
One common mistake many people do when setting financial goals is to set the time-frame “as soon as possible”. Whilst this will contribute to a sense of urgency, it’s hard to use this to create a long term plan.
Continuing on from the example above about saving £30,000 for a house deposit. Without a time frame, knowing how much you’ll need to save each month then becomes a guessing game.
Technically any money saved is progress towards the goal, although if you are only saving £100/month it will take you 25 years to hit your target. This is not ideal if you want to make the purchase in the next few years.
Setting a specific time frame will help give you a clear plan on what you need to do each year, month, week and even each day to make your goal become reality. Then will then give you the ability to set smaller objectives that align to your overall long term goals and vision.
You could end up with a number of short term (1 month to 1 year), medium (1 year to 3 years) or long term (over 3 years) goals, all aimed at keeping your on track for your long term ambition.
What is a Good Long Term Financial Goal?
The key understanding when setting long term financial goals is to ensure you have at least one short term goal that aligns with it. This will provide you with a short term target to aim for to keep you on track, giving you milestones to plan for along the way.
Multiple short term goals can also feed into one long term goal. Using the examples below, many of the short term objectives will contribute to achieving the long term goals.
Remember to use the SMART acronym explained above when defining your goals and pay close attention to making them relevant to you.
Examples of Long Term Financial Goals
- Buy a house in 3 years with a £30,000 deposit.
- Get an excellent credit score within 3 years.
- Visit 10 new countries over the next 10 years.
- Ability to retire by 40, 50, 60.
- Have a £10,000 emergency fund of liquid non-volatile assets, eg cash.
- Maintain a personal budget and update on the 1st of each month.
- Become mortgage-free in 10 years.
- Grow a business to £15,000 per month in revenue within 3 years.
- Pay off all high-interest debt by the end of next year.
- Get a job paying a salary above £60,000 per year.
Below is a list of some short term goals that align to these long term goals.
What is a Good Short Term Financial Goal?
With your short term goals, try and make them align to your long term goals. This should also make them easier to set as they should be just a smaller, much achievable version derived from your long term goal, with a shorter time horizon.
There could also be a few quick wins, such as save £1,000 for a holiday next year or apply for that new job to increase your salary. Although even with these goals, if you can make them align to bigger long term goals, it will allow you to see the big picture of why you’re striving for this change. This will also give you the motivation to push through any unforeseen setbacks and increase the likelihood of success.
Examples of Short Term Financial Goals
- Save £833 per month or £10,000 per year towards a house deposit.
- Increase credit score by 50 points by the end of the year.
- Save £1,000 by December to buy a holiday next year.
- Save 10% of income for retirement.
- Save £200 per month towards an emergency fund.
- Create a personal budget for this calendar year over the next 2 weeks.
- Overpay mortgage by £250 each month.
- Start a business and make the first sale by the end of this year.
- Pay £400 towards credit card balance each month.
- Learn a new skill or strengthen an existing one that will enhance career prospects (eg stakeholder management, presenting, Excel).
The previous section includes a list of long term goals that align to these short term goals.
How to Prioritise Your Financial Goals
Goal setting is a very personal exercise without a one size fits all approach, so prioritising them can become difficult. Knowing this can either be a blessing or a curse, although let’s aim for the former. Below are a few simple ways that you can use to determine what is most important to you and how you should prioritise your goals.
Warren Buffett’s 5/25 Strategy
This is a strategy from Warren Buffet, the CEO of Berkshire Hathaway and one of the most well known and respected investors of all time.
The story goes that Warren was talking to the pilot of his private jet, Mike Flint, and jokingly said to him that the fact he was still working for him after many years meant he wasn’t doing his job properly and encouraging him to go after more of this goals and dreams.
He then laid out a simple process for finding and prioritising exactly what you want.
- Step 1: Write down your top 25 goals
- Step 2: Draw a circle round the top 5 goals
- Step 3: Focus on your top 5 goals and ignore the rest
This can be done for any type of goals in life, including when setting financial goals.
To do this exercise yourself, write down the top 25 things you want to achieve financially. This can be anything and hopefully you can take some inspiration from the list of short and long term goals highlight in the sections above.
Then put them in rank order of importance to you, and focus on the top 5. Then when you achieve one, can add in a new one to focus on.
The Eisenhower Priority Matrix
To help with prioritisation, this matrix is a useful exercise and can be applied to goal-setting. To use this method, number each of your goals with a 1 to 4 and try to be as accurate as possible.
I’ve added an example to each one to help.
- Urgent & Important
- Pay off high-interest debt
- Urgent & Not Important
- Finding a new job because you dislike your current boss.
- Not Urgent & Important
- Saving 10% of your income for retirement.
- Not Urgent & Not Important
- Buying a new car on finance when you already have a very good one.
Now when combined with the Warren Buffet 5/25 strategy, it should help you understand what you need to focus on first and how best to rank them in a list.
When doing these exercises, it may help to just focus on your long term goals. This will help you understand when you want to be in the long run and be able to plan your steps to get there accordingly.
Now when you set your short and long term financial goals, the short term activities should align more to the urgent category and the long term goals should align towards the important category.
Obviously these aren’t the only methods to prioritise your goals, although this should help focus your mind and efforts on defining what you truly want to achieve.
Why is it Important to Prioritise a List of Financial Goals?
There are many strategies to help you prioritise your financial goals. The key lesson is to understand that we have a limited amount of time, energy and focus to put towards our goals each day. By chasing too many goals at the same time, we get distracted, lose focus and risk failing to achieve any of the goals.
Remember the saying, “the man who chases two rabbits catches none”.
Know Your Why – True Inspiration & Motivation
Knowing why you want to achieve something and having a purpose is the true secret to endless discipline and motivation. This will ensure you stay on track with your financial goals, even through multiple challenges and setbacks.
As you can imagine, all are quite useful for making sure you achieve your financial goals. Plus there’s also the desired benefit of living longer on average, so you get to enjoy the satisfaction and advantages of that success for longer.
Although do remember that you will never exceed your highest expectation, so make sure sure you push yourself when setting financial goals. This will give you the motivation and disciple to do what’s needed to be done to achieve success.