How to Set and Achieve Financial Goals

Last updated on July 23rd, 2017

Goal setting is a crucial part of financial planning. Without clearly defined financial goals, it can be difficult to make any financial progress.

Yogi Berra highlighted this point long ago:

“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.”

Goal Setting Guidelines

Before we get carried away with the details, it might be helpful to understand the science of goal-setting. A large body of research has developed in the last 50 years that explains how to set and achieve your most important financial goals.

Dr. Edwin Locke is the father of goal setting theory, and one of the most widely cited psychologists of all time. His findings are summarized in a publication titled “Motivation Through Conscious Goal Setting” and later confirmed in a massive research meta-analysis. This combined research has identified the most important principles behind effective goal setting. These include:

1) Specificity

Clear, specific goals are much more likely to be realized than vague, loosely defined goals.

“The more specific or explicit the goal, the more precisely performance is regulated.”

– Edwin Locke

2) Challenge

Goals that are too easy or too difficult are unlikely to be accomplished. The highest level of motivation is achieved when goals are both challenging and realistic.

“Goals that are both specific and difficult lead to the highest performance. The highest level of effort occurred when the task was moderately difficult, and the lowest levels occurred when the task was either very easy or very hard.”

– Edwin Locke

3) Commitment

Commitment provides the motivation and perseverance required to achieve challenging goals. You have to believe in what you are doing and why you are doing it.

“High commitment to goals is attained when (a) the individual is convinced that the goal is important; and (b) the individual is convinced that the goal is attainable.”

– Edwin Locke

4) Feedback

Once you set specific goals, it’s important to track and monitor your progress.

“Goal setting is most effective when there is feedback showing progress in relation to the goal.”

– Edwin Locke

Setting Financial Goals

The S.M.A.R.T. goal-setting system builds upon this research and suggests five criteria that should be incorporated into each of your goals:

  • Specific 
  • Measurable
  • Attainable
  • Relevant
  • Time-bound

Using the S.M.A.R.T. framework, it’s time to begin defining your financial goals. The first step is figuring out what matters the most to you. What are you hoping to achieve with your money?

For Vanessa and I, the goal creation process begins with a brainstorming session. We sit down and talk through our ideas until we share a similar mindset and a unified set of goals, and then we write everything down. We don’t try to sort or refine each goal at this stage in the process.

I would recommend this approach because the combination of talking and writing will bring clarity to your thought processes. This clarity will allow you to better understand and reflect on the relationship between money and life. Once you understand that your money can be used to improve your life, the goal-setting process becomes real and powerful.

Sorting and Prioritizing Financial Goals

After brainstorming, you might have 20 goals competing for your money. As a result, it’s not wise to lump every goal together and hopelessly struggle to accomplish a few. Instead, it helps to build a system based on timing and importance.

We like to first sort goals by time horizon.

  • Short-term Goals (12 months or less)
  • Medium-term Goals (1-5 years)
  • Long-term Goals (5+ years)

After separating each goal by time horizon, you should decide the importance of each goal. If you’re working with a modest income like most people, there isn’t enough money to go around. Ranking goals by their relative importance will allow you to prioritize the goals that mean the most to you.

Some of your goals should be intertwined, because short term goals are often the basis for longer term goals. You can’t be debt free without eliminating your credit card debt. You can’t retire without saving and investing a portion of your income. It’s also important to remember that some financial goals will be a one time event, while others might occur every year.

To help you in the right direction, I’ve made a list of possible financial goals ordered by importance and time horizon. Feel free to modify this list to fit your personal situation.

Short-term goals (12 months or less):

  1. Verify health, auto, and homeowners insurance coverages (this month)
  2. Set automatic minimum payments on all forms of debt (this month)
  3. Cut monthly expenses by $400 (starting with next month’s paycheck)
  4. Increase 401k contributions at work to receive the maximum employer match (next month)
  5. Save $2,000 in an emergency fund (within 6 months)
  6. Negotiate a raise at work (before you next birthday)
  7. Save $3,000 for a family vacation to Asia (within 12 months)
  8. Sell unused household items to completely eliminate your credit card debt (within 12 months)

Medium-term goals (1-5 years):

  1. After all credit card debt is eliminated, complete relevant estate planning documents (before 12/31/2019)
  2. After finishing the estate planning, save at least 20% of total monthly household income (before 12/31/2020)
  3. After reaching a 20% savings rate, save an additional $500 per month for your child’s college education (before 12/31/2021)

Long-term goals (5+ years):

  1. Eliminate all debt, including the mortgage (before 2030)
  2. Accumulate $500,000 dedicated to financial freedom (before age 45)

These are just a few quick ideas to get you started. Your own goals could look similar, or very different. What matters is defining the goals that are important to you.

As you work toward each goal, make sure to monitor your progress on a regular basis. Because you followed the S.M.A.R.T guidelines, you will have specific, measurable goals to complete within a given time frame.

A Financial Goal Setting Example

The financial goals that I provided in the previous section were meant to get you thinking. But let’s take it one step further and consider a detailed financial example.

Suppose your most pressing goal is finding a new job.

Work consumes a large part of most days in America. If you are miserable at work, it can be difficult to enjoy life on a daily basis. But work provides a stream of income, which pays the bills. You can’t quit outright because you need that income to support your living expenses.

One solution to the problem is finding a new job or starting a new career. While that might seem a daunting task, your financial goals can help you get there quicker. Here is how:

Step 1) Determine your income and expenses.

Your first goal should be to create a system to track your income and expenses. You can’t begin to make financial changes without knowing your current spending habits.

You might consider a traditional budget or an automated solution like Personal Capital (our choice).

Step 2) Create a savings goal

If you earn $50,000 per year right now and save none of your income, it’s impossible to leave your job because you are 100% dependent on the monthly paycheck. To change this, you have to begin saving a portion of your income. This pool of savings can later be used to fund your living expenses (after leaving your current job).

There you have your first financial goal: “Beginning next month, save at least $500/month in a savings account dedicated to finding new employment.” If you are unsure how to find the $500 in savings, set another goal to reduce spending. There are a lot of people living on less than $50,000/year.

Step 3) Figure out your target savings

If you are able to save $500/month, you will accumulate $5,000 in savings after ten months. Is $5,000 enough money to leave your current job?

Only you can answer that question. If you need to save $10,000 before you are comfortable leaving your job, set another goal to build upon your first goal: “Beginning next month, save $500/month until I accumulate a minimum of $10,000 (dedicated to finding new employment).”

While saving $500/month, it will take you about 20 months to save $10,000. If you can’t stomach another 20 months at your current job, you need to redefine your first goal and increase your target monthly savings. While that is easier said than done, it’s a fact. You must decide between staying at your job for a longer period of time, or spending less money each month (increasing your savings rate). Which is more important to you?

This scenario illustrates the importance of feedback that I discussed earlier. If your original goal no longer works for you, redefine the goal or change your habits.

Step 4) Find a new job

If you remain devoted, your pot of savings will grow each month. Eventually, you will accumulate enough money to quit your job and find something else.

Each financial goal discussed above is a stepping stone on the path to your ultimate goal – finding a fulfilling career.

Step 5) Rinse and Repeat

Most goals can be achieved using a process similar to the one just described. It’s not always quick and easy, but it’s a proven method.

First, figure out how much income you have available. Second, figure out how much of your income should be dedicated to each financial goal. Third, increase your income and/or decrease your expenses to improve available cash flow. Fourth, continue setting, achieving, and refining your goals.

Summary – Set and Achieve Your Financial Goals

As a quick review, here are the steps that I recommend you take:

  1. Understand and commit to setting S.M.A.R.T financial goals
  2. Brainstorm financial goals (with your spouse if applicable)
  3. Sort goals by time horizon: short, medium, and long-term
  4. Prioritize the most important goals within each time frame
  5. Work towards achieving the most important goal(s)
  6. Rinse and repeat

Thank you for reading my guide to setting and achieving financial goals. Let me know how you handle this process with a comment below.

Comments
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  10. Reply

    Awesome post. I feel like I have read many of these, but this was a bit more effective for me. Helps encourage me to make a few more financial goals. Thanks for sharing!

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  16. Reply

    Good reminder about the importance of having defined goals and writing them down, especially with a spouse as you have done. My wife and I made a big 2017 goals board this year in a timeline format. We have it in our bedroom to remind us every day. That gives us more energy than a cup of coffee 🙂

    My financial goals mostly revolve around creating passive income streams. The goal for 2017 is to create an additional $1k/month in income that will last a lifetime. I want to be able to spend time with my kiddos when they come along!

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    • Microfinance
    • October 1, 2016
    Reply

    That is a great list of points about how to get your financial goal setting right. I would prefer if you could suggest some software that can help in managing you finances and help you save money. Without a software doing all this on paper and going through your bank statements manually to figure out where the money comes and goes can be quite cumbersome.

      • Jacob
      • May 5, 2017
      Reply

      Hi Micro,
      Personal capital is a robust (and free) software solution that will track your income and expenses in real time.

    • ESI
    • August 15, 2016
    Reply

    Good for you guys!

    Keep doing stuff like this through the years and you’ll do quite well.

    Wish I was this organized when I was your age, but I picked it up quickly soon after. 🙂

    • David
    • June 25, 2013
    Reply

    Hi Jacob,

    Your guide to setting up financial goals is motivating. Goal-setting is really essential for everyone. It can be the first step towards realizing monetary stability

      • Jacob
      • June 25, 2013
      Reply

      Thanks, David. I’m glad you enjoyed the post!

    • Greg
    • June 24, 2013
    Reply

    Gotta love the SMART goals! Great breakdown and certainly necessary for an effective financial strategy. My wife and I talk about our strategies a lot and really get into the nitty gritty to make sure our reasoning is sound for our plan of attack. I think this is something everyone should do.

      • Jacob
      • June 25, 2013
      Reply

      Amen Greg, and it’s so rewarding to be able to discuss these things with a spouse. Congrats to you guys!

    • Jake
    • June 24, 2013
    Reply

    This is an awesome overview. I really like SMART goals because you are more apt to reaching your goals if they follow those steps. I think the most difficult part for me is prioritizing. It’s hard to know whether I should be saving a ton for retirement now, or saving for a down payment on our next house. Both are good ideas, it’s just how much do I need to allocate to each of them.

      • Jacob
      • June 25, 2013
      Reply

      Thanks Jake! I definitely sympathize with you there. Not enough money to go around for either of us! I think it’s all about interest rates and trying to pick the best move financially. Of course, who knows what the future holds?

    • Laura
    • June 24, 2013
    Reply

    Jacob, great and thorough post! You’ve really set this up in a way that helps people understand why setting financial goals is so important.

      • Jacob
      • June 25, 2013
      Reply

      Thanks Laura!

    • Shannon
    • June 21, 2013
    Reply

    A wonderful post, Jacob! Goals are so important, otherwise it’s so easy to rationalize using money for others things when you don’t know what you’re working towards. So many people are generic with their goals or even worse – use other people’s goals as their own. I think figuring out goals is fun. I want to the live the life I WANT, so why wouldn’t I take some time to figure out what it will look like. This is what keeps me motivated and helps me make smart decisions. Have a wonderful weekend!

      • Jacob
      • June 25, 2013
      Reply

      So well said, Shannon. I’m sure you see this a lot as a financial planner! It’s about choosing what matters most, which is probably the part that most people need to figure out first.

  18. Reply

    You make some great points especially about setting firm goals. Just saying that you want to save more than you earn doesn’t mean much. You can save a few dollars every month but that won’t add up to much.

    My wife and I calculate our finances through a spreadsheet. We know when certain things are paid off and what areas we can cut more out of. Our goal is to have a lot of money saved up so we can invest more of it. Plus, we want to put more to our mortgage back home so we can take that rent we get from it as extra income. We’d honestly rather have the money than a lot of stuff. Plus, we want to travel more.

      • Jacob
      • June 25, 2013
      Reply

      Sometimes I think we are twins Steve! Sounds a lot like our system and a lot like our goals! Wishing you and your wife the best, and safe travels!

    • John
    • June 21, 2013
    Reply

    Great thoughts here Jacob! I think one of the areas we fail in is not making our goals quantifiable and thus have no clue how to reach them. I find that by making them quantifiable, it makes the planning process that much easier to set. Additionally, writing them down is huge. If I can see it on paper, then it’s a constant reminder to me about what I need to be doing.

      • Jacob
      • June 25, 2013
      Reply

      Thanks John, and very well said. There needs to be a quantifiable goal that has made its way out of my head and onto the paper!

    • Gaming
    • June 21, 2013
    Reply

    Nice quote from Yogi Berra! So true. We are naturally good savers, but once we set a goal to pay off our mortgage in 5yrs we saw a huge change in our savings rate. We had a purpose!

    Only 11 months left now!

    Everyone should follow this guide and set a clear financial goal. It’s amazing what can happen when you are striving for something.

      • Jacob
      • June 25, 2013
      Reply

      That’s awesome and inspirational! Congratulations!

    • Paul
    • June 20, 2013
    Reply

    Great check list. If you just focus on the short term you won’t go far. I like to dream big, even to reach half way to that dream will be something better than status quo.

      • Jacob
      • June 21, 2013
      Reply

      Good points Paul. Setting long term goals are crucial!

    • E.M.
    • June 20, 2013
    Reply

    It is so important to have specific goals in mind with money, because so many people neglect to take saving and spending into consideration. It’s easy to say “well, I want to save $500 this month,” but do you know how you’re going to do that? There needs to be a method.

    I admit that my goal right now, to pay off my student loans, is general. That’s mostly because I just moved into an apartment, so all the extra saving I was doing before is gone! I want to assess how things went at the end of the month, and evaluate from there what I can afford to pay toward my loans. I’m not paying the minimum, but it’s preventing me from making lots of extra payments which I would love to do to speed up the process. Hopefully I figure it all out next month!

      • Jacob
      • June 21, 2013
      Reply

      Hey E.M, thank you for the thoughtful comment! You make a couple of excellent points.

      That’s still a great goal to have. It’s one of ours as well. We also just moved and haven’t had steady income yet, so I totally understand the feeling. Once it’s possible, we’ll set a definitely dollar amount, but until then we are in the same boat. Keep up the great work!

    • Rebel
    • June 20, 2013
    Reply

    This is a wonderful starting place for anyone looking to get a real handle on their financial future. I especially like the idea of brainstorming and writing it down. I put everything in an evernote notebook.

      • Jacob
      • June 20, 2013
      Reply

      Thanks Reb. We are convinced that writing it all down is key. Every thought needs to go on paper.

 

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