Do you make New Year’s resolutions you intend to keep? Same.
I am pretty introspective and reflect on my important values all year round. Comes the end of the year, I make resolutions to do or not do something. I always intend on sticking to these aspirations, or so I promise myself.
If you set resolutions and break them, you are not alone. Studies show less than 25% of people stay committed to their pledge, and after just 30 days, only 8% accomplish them.
Resolutions are really open-ended promises without a plan. They may be well-intended, but they are often broad and often unmet. Here we speak of financial goals. Goals are specific targets addressed by planning and managing our finances. It will help make better financial decisions.
When we set financial goals to achieve the desired result, we may establish a new habit or replace an unwanted one like paying bills late. Achieving financial goals is part of successful financial planning, which involves setting short-term, intermediate, and long-term objectives. Whether you seek financial stability or substantial wealth generation, the process is the same.
Goals Should Be SMART
A SMART approach can help us achieve our financial goals to reach them better. You can adapt this approach to your business, personal finance, or career goals. The acronym guides us:
- Realistic (or Relevant, Reasonable)
A SMART Example: Saving For An Emergency Fund
You want to establish an emergency fund to cover essential living expenses for unexpected events like a potential job loss. While you haven’t lost your job yet, you haven’t set any money aside. So it is time to open up a high yield savings or money market account. Save by automating weekly transfers from your paycheck here until you get to a six-month target of $1,500. (SPECIFIC) Avoid broad or vague goals that may impact your motivation.
How long should it take to save for six months of living expenses? It depends on your willingness to save more and spend less to have an ample fund. When you set your goal, you want it to be achievable within six months or a year, making sure your plan is reasonable. (ACHIEVABLE, REASONABLE) Keep in mind that your savings are after-tax income. If you can save 5%, your spending amounts to 95%. If you can save 20%, there is 80% for spending purposes. (MEASURABLE)
A back-of-the-envelope calculation can help determine how long it will take. To save one month’s needs, divide the percentage of spending by the rate you are saving. If you can only save 5%, you are spending 95%. Divide 95 by 5, and it will take 19 months to save one month for your emergency fund.
Do you want a slow and steady plan, or would you rather build up your emergency funds more aggressively? It is up to you. More aggressive savings of 20% of after-tax income produces a more satisfactory four months timeframe. (TIME)
Keep in mind that some goals may be short-term, meaning twelve months or less such as beginning to save for a car down payment, while other goals could be multiyear projects. Investing in your child’s college tuition or your retirement is a decades-long objective.
Why It Is Important To Set Financial Goals
Setting financial goals help you make more conscious decisions that affect your financial health. Perhaps you have been winging it and doing fine thus far. However, you may neglect some things like buying term life insurance or increasing your savings for retirement and college tuition that could be consequential in the longer term.
By establishing your goals individually or with your partner, you can make sure you are staying on the path you most desire so that you can buy your dream house, retire in comfort, and avoid the burden of too much debt. You and your partner should agree on common financial goals, and break them into what your financial priorities will be and in what timeframe.
It is always a good time to review your financial goals, and you don’t have to wait for the beginning of the new year to do so. The new year happens to be a good time for goal-setting as it brings closure to the past period and possible mistakes you want to avoid. There is a certain optimism when you look at an empty calendar and a clean slate in the new year.
Twelve months is a reasonable timeframe for your plan as it is long enough to assess your goals and produce meaningful achievements yet short enough to make changes in mid-year. Think of the short-term, midterm, and long-term goals.
When you are setting financial goals for the first time, you may want to consider meeting with a certified financial planner who can help you create goals that are reasonable for you and your family.
Financial Goals Should Be Consistent With Your Values
Your financial goals should be consistent with your values. Setting financial goals help you visualize your current financial status and where you want to be in the future. Be mindful that you aren’t setting financial goals that conflict with essential life goals.
Visualize What You Want Longer-Term But Track Your Progress Now
If your primary goal is to buy your home, let’s say it’s a house, tape a beautiful place to your refrigerator as inspiration. You can use quotes as a reminder that you will finally be free of costly credit card balances by September 2022 based on your debt management plan.
Do what best works for you. I recall using a bulletin board in my office with names of months on the top and specific goals on the left-hand side and yellow post-its (I don’t think they were in various colors then). I used quarterly goalposts, broken into monthly targets to spearhead me toward the following quarterly and annual goals for writing, marketing, calling clients, research, attending conferences.
Staying motivated is a big part of the equation to move forward to achieving your goals, whether losing weight or saving a monthly amount.
To envision your goals, you can use various ways to track your progress:
- Keep a journal
- Vision board
- Specific budget apps like Mint or Personal Capital
- Strides app tracks goals and habits
- Review progress with your partner/family
- Reward yourself for significant accomplishments.
Examples of Common Financial Goals
Sometimes it is tough to know where to start setting goals you want to accomplish. Review your achievements in the prior year, and consider relevant financial objectives for 2022. Apply the SMART approach to your goals.
Here are some examples of common financial goals:
- Create a budget or use a budget app.
- Review your monthly bills and negotiate rates where possible.
- Paying off monthly credit card debt in full.
- Interview a few financial advisors.
- Don’t finance any appliances or similar products with credit cards.
- Confirm with employer withholding of taxes is sufficient.
- Save more money by dining out less during the week.
- Allocate more savings toward paying off debt or investing more.
- Target becoming debt-free.
- Shop for a high-interest savings account or money market account.
- Create or replenish an emergency fund up to $1,500-$2,000.
- Begin the process to buy a home.
- Establish a 529 College Savings Plan.
- Increase your retirement savings.
- Contribute to your employer-sponsored retirement plan.
- Automate your finances where possible.
- Begin monthly savings for a car or home down payment.
- Raise your credit score.
- Review your credit reports for errors or fraud.
- Take your hobby to the next step of making money.
- Invest more money in low-cost index funds.
Examples of Career Goals
Beyond financial goals, you should identify your goals related to what you want to do for a living, whether it is for your specific job or career field. Consider your level of contentment or whether you need to make a change soon or in the future. Here are a few examples you can apply the SMART approach to your job or career goals:
- Review your hard and soft skills, and build up relevant gaps.
- Improve negotiation, writing, or public presentation skills.
- Speak at more conferences where you can network.
- Ask for specific help from a potential mentor.
- Be a mentor to someone who could use your guidance.
- Use constructive criticism to turn a weakness into a strength.
- Take more training to keep learning and update your skills.
- Organize your schedule with a planner.
- Do a workshop for your group.
- Be more proactive when collaborating with your team.
- Research your value to the firm by talking within and outside the firm.
- Finish tasks before the deadline so you can review for errors or problems.
- Start a side hustle.
- Ask for a raise or promotion if deserved.
- Write an article for a journal in your field.
- Update your resume for last year’s achievements.
- Request a new rotation to add experience in a tangential area.
- Be a better listener to your colleagues, team, management, and clients.
Reasons You May Not Achieve Goals And How To Do Better
Try An Abundance Mindset
Setting goals are not an achievement. Beginning the year with a pledge to lose 20 pounds in one year may sound realistic, but you need a plan to eat more healthily and exercise during a year to track your progress and turn it into a good habit. It is then easy to give up than start from scratch. However, bad eating habits kick in more easily than building new habits.
Overeating is not very different from overspending. If you want to cut your monthly spending by 10%, you need to modify how you shop. Having a target is hard to accomplish without a behavior change.
Your scarcity mindset may be getting in the way, always looking at the half-empty glass with a negative attitude. On the other hand, those with an abundance mindset are far more optimistic, don’t give up as quickly, and have a positive attitude that will allow them to achieve their goals.
Our Targets May Be Unrealistic
A significant benefit of the SMART approach is that you set specific and reasonable targets. You can raise your goals as you accomplish them. When goals are unreachable or too high, like getting a new job in three months with a 25% raise, you quickly feel defeated. If you set your goals too low, they may be easy to achieve, but at least your motivation will propel you ahead.
Make good habits by achieving goals. For example, you have been actively saving more in your emergency savings account, so you upped the ante, and now there are more than six months of funding, and already you feel less stressed. Click your wine glasses and move on to the next financial goal.
Use Discipline And Willpower
To carry out your goals, you need to be diligent. Without discipline and the will to succeed, plans are unsustainable.
Charles Duhigg wrote in The Power of Habit: “Willpower isn’t just a skill. It’s a muscle, like the muscles in your arms or legs, and it gets tired as it works harder, so there’s less power left over for other things.”
We sometimes lose our will to change when life interrupts us to divert attention from our goals. Sometimes a death in the family can cause a major derailment. Discipline and willpower need to be supported by a conscious plan to get back on track when surprise events occur, like a death in the family. This way, a momentary pause doesn’t become a permanent loss of interest.
“The chains of habit are too weak to be felt until they are too strong to be broken.” Samuel Johnson
Replace Bad Habits With Good Habits
Once formed, habits allow us to do things automatically in everyday life. Our practices begin through repeated actions that may come with rewards.
According to Johns Hopkins University Professor Susan Courtney, our brains release dopamine, facilitating connections between brain cells. Those hardwired habits in the other parts of the brain automatically take over when stressed.
We can break or curb bad habits by overriding the old ones in our brains. Set up physical reminders about your savings target or hide things like your wallet. Putting cookies away in a different place or hiding credit cards may work. Going shopping with only cash will slow unnecessary spending.
Good Habits May Help You Exceed Your Goal
Goals may limit you, whereas good habits may exceed our targets. If you easily managed to save $400 a month in your retirement account, consider increasing the amount to $500 per month. I am at fault for setting 30 minutes on the treadmill and jumping off. Limiting the time happened because I had to call or go to work. However, once I took away the time limit on the treadmill or outdoors, I found more energy to go further.
Repetitious nature allows us to fulfill our goals more quickly. It may mean going on the treadmill every day at a particular hour, reading at a specific time in the evening, or going grocery shopping with a list.
Break Goals Into Smaller Parts
Many of us borrow too much by putting everything on our credit cards. We are often surprised by how fast our debt balances grow. We shouldn’t be, as the higher interest charges on our cards keep the balances growing fast.
Saying you will reduce your debt to zero is a great goal but may be difficult and unreasonable. Instead, plan to make a specific monthly amount that you can reasonably handle to lower the balance, even if it takes longer than a year. Becoming debt-free can be your long-term goal, but first tackle credit card debt balances.
There are two popular ways to pay down debt. The Snowball method, where you tackle the smallest debt balances first, is often preferable for many. Small wins provide a psychological boost. The alternative often referred to as the Avalanche method, is better for others. There, you are reducing the debt carrying the highest annual percentage rate first and incredibly desirable when you have high card balances.
Either way, paying off debt regularly or paying down your balances to zero are good financial habits to reinforce for those who struggle to pay bills constantly.
Good Financial Habits For Life
I sometimes envy daily runners plowing on in the heat, snow, rain, and sleet. They have formed healthy fitness habits that will last all their lives. According to Duhigg’s research, habits control 40 percent of our conscious activities. Taking showers and brushing our teeth are activities; we just do them. That’s a good thing. Our lives would be far more chaotic if we couldn’t form habits.
That said, these minuscule actions are ingrained in us. Habits often propel even our driving. Ever driven on a familiar road and don’t recall getting there. I don’t mean you forgot where you were going, but it is more like you were on automatic pilot.
Set your financial goals, and achieve them with good habits you picked up through motivation and positive rewards. Start with one or two financial goals, and use discipline and willpower. Building a single good habit can be modeled into other practices, having a compound effect on our lives.
Automate your finances, so you never forget a bill, even for a new subscription. For example, you want to improve your credit score this year, but you are sometimes late paying one of your bills. Lenders penalized you for being late by just two days for a $25 payment. The magnitude of the dent in your credit score occurred because your payment history accounts for 35% of your credit score. This is an important lesson.
Set financial goals that are achievable that you can accomplish. Decide what areas you need to work on to manage your money better, and develop a specific plan to achieve the desired result. Take steps to eliminate the financial stresses to have financial security and succeed in life.
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.