If your budget is your map, your financial goals are your destination. Before you can budget your money, you need to know where you’re heading.
Studies say this one thing will help you to be happier and healthier.
It will help give live a sense of direction and purpose.
It will help you build long-term financial security.
But most of us never do it.
What am I talking about?
Setting concrete goals allows you to make dreams and wishful thinking a reality.
And financial goals underpin most other goals. Want to own your own home, go on a holiday or study?
You’ll need to consider your financial goals first.
Without goals, there’s no reason to budget your money.
Studies have shown that people who set goals, and better yet, write those goals down and share them with others, are more successful than those who don’t.
“The positive effect of written goals was supported [by the research]: Those who wrote their goals accomplished significantly more than those who did not.” [source]
So before you start budgeting your money, it’s important to know why. What’s your motivation? What do you want besides just paying the bills and getting by?
THE IMPORTANCE OF SETTING FINANCIAL GOALS
FINANCIAL GOALS INCREASE HAPPINESS
When it comes down to it, our main goal in life is to be happy.
Setting and working towards goals is one important way to increase happiness.
“…the successful pursuit of meaningful goals plays an important role in the development and maintenance of our psychological well-being. To the extent that we’re making progress on our goals, we’re happier emotionally and more satisfied with our lives” [source].
It’s important to note that it’s not so much achieving goals that make you happy but making progress towards your goals. Having something to work towards gives you purpose in life.
FINANCIAL GOALS MAKE DREAMS A REALITY
Setting goals increases your chance of successfully making your dreams come true.
A goal is result oriented – it gives you something concrete to work towards, which in turn helps you develop a concrete action plan.
Here’s an example of the difference between dreams and goals:
Dream: I wish I was debt free.
Goal: By the end of next year I will have paid off my $12,000 credit card balance.
The goal above is specific – it states the exact amount that needs to be paid off. It sets a time for when the goal will be reached. It’s measurable – you can easily monitor your progress towards your goal.
Because this goal uses specific details and sets a time limit, it’s easy to develop an action that will see this goal successfully achieved.
FINANCIAL GOALS HELP YOU STOP LIVING FROM PAY TO PAY
Setting financial goals is the first step to taking control of your finances and stop living from pay to pay.
Maybe your goal is to establish an emergency fund, or save for a deposit on the house, or to increase your super or pay for the kid’s schooling or go on a holiday.
Whatever your goals are, taking time out to set concrete goals helps you to step back and look at the big picture of your finances.
It’s all too easy to get caught up living day to day, reacting to whatever circumstances arise.
By setting financial goals, you can start to think about how day to day spending will affect those goals.
Rather than reacting, you can start living proactively with your money.
FINANCIAL GOALS HELP YOU DEVELOP A FINANCIAL GAME PLAN
To achieve your financial goals, you need a game plan.
You need to break your goals up into actionable steps and allocate a time or a method of accomplishing each of those steps.
Another name for your game plan is your budget.
tips for setting financial goals
1. IDENTIFY SHORT, MID-TERM AND LONG-TERM GOALS
Short-term goals are goals that can be achieved in less than a year. They might include saving up for a new oven or a holiday or paying off a credit card.
Short-term goals might be part of longer-term goals. For instance, if your goal is to renovate your house, then a goal for this year might be to do the bathroom.
Mid-term goals are goals that are achievable between 1 and 5 years. They might include overseas travel or studying.
Long-term goals are goals that will take more than 5 years to achieve.
How do you work out your long-term goals?
Imagine what your perfect life would look like. Where would you live? What would you do with your time?
Your long-term goals are goals that will help you realise that vision.
2. PRIORITISE GOALS
For most of us, funds are, unfortunately, limited.
So you’re not going to be able to work towards all your goals at once.
Look at your list of goals and decide which ones are the most important. Those are the ones you want to work towards first.
3. CREATE AN ACTION PLAN
The action plan is the most important part of goal setting. Taking action is what turns dreams into reality.
If your goal is a savings goal, then you might automatically pay yourself first each payday.
If your goal is to reduce debt, you might create a debt snowball plan.
The important thing is to break your goal up into small actionable steps and then action those steps!
4. ENJOY YOUR SUCCESS
Reach a saving goal or pay off your debt?
Find frugal ways to share your progress and celebrate your successes before moving onto the next goal.
If your goal is big, it’s a good idea to mark milestones along the way and celebrate reaching these too. Celebrating milestones will help keep you motivated to continue working towards your goals.
5. CREATE SOME MORE GOALS
Remember how it’s the working towards goals that is important for happiness, not the actual reaching of goals?
It’s important that once you achieve your goals you set some new ones so there’s always a purpose – something to look forward to.
The first step to managing your money is understanding what you want from your money. What do you want to do besides pay the bills and live day to day? Once you know that, you can make better financial decisions that support your goals and help you to thrive not just survive.
Read further: How to Use Brain Science to Reach Your Goals