Setting financial goals 

Setting meaningful financial goals may be the smartest thing you do that will provide you with financial security and freedom in the future.

You can spend a lot of time focusing on your financial situation but unless you have specific goals you may struggle to change your current situation. Goal setting is an important part of developing your financial plan. Having clear financial goals will make it easier to focus on investing strategies to help you reach them.  It will also help you measure how well you are tracking along the way.  

Let’s explore why goals are so important in a little more detail, lay out the goal setting process and talk about the different timeframes that you may want to consider when planning your financial goals.

Why are financial goals important? 

Investing goals are important for several reasons:

Direction – financial goals provide direction and meaning for your investing efforts. They make it easier for you to make sacrifices or stick to a budget because you know what outcome you’re striving for. They help you keep focused on the long term.

Motivation – financial goals provide purpose and energy and help you stay disciplined in your investment process. Your goals should be important to you so that they provide the inspiration for you to keep working towards them.

Accountability – writing down your goals and being accountable for your progress(whether it is just to yourself or to some significant other person) keeps you honest about how you are progressing. Regularly reviewing your goals helps keep you on track.

Accomplishment – reaching your financial goals provides you with a sense of accomplishment. Celebrating significant milestones also helps with motivation to stick with your goals.

How do you set goals?

Goal setting does not need to be hard work. It is a fairly simple process and can be done in whatever way works best for you. However, we suggest that there are a few important things you should do:

Step 1

Write down your goals.  Whether you use a piece of paper and pencil or open up a word document or use your phone to record your thoughts – it is vital to make sure you write your goals down so that you can review them down the track.

Step 2

Frame your goals using the SMART format. Make sure that your goals are:

Specific – make each goal clear and specific
Measurable – frame each goal so that you know when you have achieved it
Actionable/Achievable – you need to be able to take practical actions to achieve a goal
Realistic - A goal must be relevant and realistic
Timely – you should assign a timeframe to each goal so you can track progress and achievement

An example of a smart goal may be to save $8000 for an overseas holiday by a specific date in the future. The goal is specific; it can be measured - you will know when you reach the $8000 savings.  You can list the actions you need to undertake to reach the goal. Hopefully the goal is realistic and within your savings ability (if not, what other actions are you going to have to take?) and finally, the goal has a specific timeframe. 

Step 3

Write an action list of things that you need to do in order to reach your goals.

For example, in the goal above, actions might be:

  • Save $155 per week in a high interest online saver account for the next 52 weeks
  • Research high interest saver accounts to determine best account for this purpose.

Step 4

Regularly review your goals. The more you focus on your goals, the more your subconscious mind works on ways to achieve them.

Reviewing your goals regularly can also give you a sense of progress and, since you may have set smaller goals to reach the bigger ones, this review process is very important in keeping you motivated for the long term.

What timeframes should you consider?

Timeframes play a very important part when you are setting financial or investing goals.

Your goals could be:

  • short, medium or long-term
  • for this week, for this month, for this year or for the next five years
  • short-term goals that build toward a bigger long-term goal.

Your age too is an important factor; as you get closer to retirement, you are likely to become more risk averse and this affects the way you set your goals. Different timeframes often mean using different strategies to reach your goals. If you need money for a holiday next year or a house deposit in the near future, you are likely to use investments such as a saving account.  However, you might choose growth investments such as shares to help you reach your longer-term goals.

To help you put your goals into a logical framework check out this table with suggested timeframes.  Remember though, your goals are specific to you and may not fit into this framework so use them as a guide only.