How to set financial goals​

When you’re setting off on any kind of journey, you need map of the territory and a route planned out. If you don’t start with a clear picture in your head of where you’re trying to get to, you’ll never know whether you’ve made it there or not.

Planning out your financial goals isn’t nearly as difficult as it probably sounds. All you’re doing is setting your sights firmly on the future you’re trying to build. After that, it’s just a matter of stacking one brick on top of another until you make it. There are bound to be a few obstacles to negotiate along the way. In fact, you might find yourself having to revise the goals you originally set out with as your circumstances change. Even so, good planning right from the start will mean you can keep on making progress even when things are stacked against you. Whatever your goals turn out to be, knowing up-front what you’re trying to accomplish will make every decision you take a long the way easier. Before you know it, you could well find those original goals were a little too cautious. That’s when you know it’s time to start thinking bigger...

It’s tough to make big plans for the future when you’re only just getting by right now. Not every financial goal you set for yourself has to be some grand scheme that might take decades to pay off. For instance, getting the earliest possible start on setting up your retirement is definitely a smart idea. However, you’ll probably need to work your way through a bunch of simpler, more immediate goals to get there.

Your short-term goals are mostly going to revolve around the simple necessities of getting safely through to the end of the month. This basically falls into the category of day-to-day household budgeting – which you can read more about in several of our other guides, like these:

• Budgeting for Christmas
• How to budget if you're self-employed
• How to make a budget spreadsheet

There’s a lot more to short-term financial planning than watching your everyday spending, though. Your near-future goals could easily include larger targets, like saving up a deposit for a home or buying a car. When we talk about long-term plans, we’re including things like clearing your mortgage, shoring up your retirement funds and raising kids. These are projects that will probably take many years or decades to complete, but unless you set yourself some eventual goals to hit and plans you can stick to, it’ll be difficult to make any serious progress toward them.

The main point of dividing your plans up into the short and long terms is to help you stay realistic about what it’s going to take to get you there. It’s all too easy to give up way too soon on a target, simply because it seems like such a huge mountain to climb. However, just making a little regular progress toward the summit is all it takes to succeed if you’re realistic about the pace you can keep up over the long haul.

So let’s look at some actual specifics here. Making a financial plan, whether for the short or long term, is all about being properly organised. What does that mean in practice? Let’s break it down into easy steps with the SMART system:

• Your goal has to be Specific.
  There’s no point setting yourself some vague, non-committal target that won’t even let you realise when you’ve achieved it. Having non-specific financial goals is like walking into a travel agent and asking for a ticket to “abroad”. Get serious about what you’re trying to accomplish, and put an actual number on it. Depending on your situation, your goal might be a one-off (like putting a deposit together) or ongoing (like saving a specific proportion of your income each month). Either way, you should be able to tell exactly when you’ve hit it.
• Your progress has to be
  This step should be pretty easy once you’ve set your actual goal. All you really have to do here is track the steps you’ve taken toward it. Again, your specific circumstances will determine the kind of progress we’re talking about. If you’re saving toward a defined target, you need to keep track of how much you’re putting away and how often you’re doing it. If you’re paying down a loan, you have to weigh the payments you’re making against the interest you’re racking up.
• Your goal has to be Achievable.
  A bit of an obvious one, perhaps, but definitely worth spelling out. For the most part, this step is about planning out the concrete steps you’ll be taking to hit your overall goal. For example, are you following the 50/30/20 rule of budgeting when your money comes in each month? Are you setting up automatic transfers to a savings account and keeping that cash “ring fenced” for your target? This is where your planning gets put into action for real.
• Your target has to be Realistic.
  Nothing kills a financial plan faster or more reliably than picking a fight you’ll never be able to win. A serious plan can certainly be challenging, but letting your everyday debts mount up so you can keep saving won’t take you a single step closer to success. In most cases, the best plan is to pay down what you owe before you even think about saving toward a future goal. The interest on what you owe will almost always stack up faster, which will leave you worse off over time.
• Your goal needs to have a Timeline.
  As the old saying goes, “a goal is a dream with a deadline”. This step ties in closely with setting yourself specific goals with measurable progress. Again, though, it’s important to be realistic about what you can manage. Setting out to pay off a loan or credit card balance within a year is a great target. Trying to do it all by next month might be a little too ambitious. In some cases you might consider breaking your overall goal into smaller milestones, all taking you in the same direction. If your main goal is to save a house deposit, for example, look at the steps it’ll take to get you there. They might start with paying off an expensive, high-interest debt to plug a leak in your finances. Set a timeline for that first, then see how much more you can accomplish each month when you’re not dragging those repayments along with you.

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When you’re setting financial goals and making plans to accomplish them, there really is no such thing as starting too early. For example, how much easier would your targets be to hit if you claimed your yearly tax refunds as part of your preparation? Depending on your work costs and travel, you could be looking at a decent chunk of cash going to waste on the taxman’s desk each year if you don’t claim it. You can make your claim from the time the tax year ticks over, so make sure you’ve got your receipts and other paperwork prepared in advance. Your refund could pay off nagging bills or help wipe out expensive debts, clearing your way to put your financial plan into action. If your debts are already under control, then your refund is a serious leg-up on our overall progress.

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