Financial Goal Setting: Why You Need to Do It

In my years of working in an auditing firm, I’ve encountered people who were so good at making money. Their methods varied, but they had one thing in common: They had clear goals and worked hard at reaching them within a set period.

What they were doing was financial goal setting. It is a practice I recommend to my family, friends, and anyone who wishes to achieve financial independence and security. The idea of it is simple: Define your goals so you can work to accomplish them.

Identify Short-, Mid-, and Long-Term Goals

Financial goal setting is identifying what you want to achieve in the next two years (short-term), five years (mid-term), and ten or more years (long-term).Some people work on their plans from top to bottom: identify a long-term goal first, and then plot the short- and mid-term goals that lead towards that final prize.

For instance, your long-term goal is to have $1 million in the bank when you’re 60 years old. Suppose you are a healthy 23-year-old with $10,000 in savings. You plan to invest in a diverse portfolio of government bonds and large-cap US stocks with a conservative estimate of 6% return per year.This means you need to save $644.88 per month for35 years.

Given this information, your short-term goalcould be landing a promotion, getting a salary increase, or finding a job that lets you save more than $644.88 per month by the time you’re 25.

Give Direction to Your Life

Financial goal setting doesn’t only guide you towards financial stability; it also affects other areas of your life.The example above shows how financial goal setting can set the direction of your life:

  • Career Choices – Which industries and positions offer the salary grade you need? Which companies provide the growth opportunities you seek?
  • Priorities – Be practical about your finances. If you want to be a millionaire by the time you’re 60, buying a Bentley or Aston Martin in your mid-thirties wouldn’t be the best move.
  • Family Planning – Can you afford to raise four or five children and have enough left for your long-term monthly savings? You might also want to rethink the payment schemefor your children’s college education if it will compromise your retirement.
  • Health – If you have to work until you’re 59 years old, work on strengthening your body and staying healthy.
  • Skills Development – If you want to travel overseas after retirement invest in yourself and study a foreign language.

Tips to Get Started

Identifying your goals is the easypart. Creating a feasible plan, on the other hand, needs research and careful evaluation. You might even be disappointed; you’ll realize some of your loftier dreams will be very difficult to achieve if your present financial situation doesn’t improve.

But let’s not get ahead of ourselves. Here are three tips to help you get started:

  • Write your goals on paper. Don’t rely on your memory; there’s a good chance you’ll forget an important detail. From my experience, writing my goals helped put my situation into clearer perspective. I can see how far I am from my goals, as well as the things I need to accomplish to get there. It also felt like signing a contract.
  • Use the SMART formula. Choose goals that are Specific, Measurable, Achievable, Realistic, and Time-Bound. SMART planning ensures that your goals are plausible and not the products of fanciful thinking.
  • Make time for financial goal setting. Find a quiet place, invite a financial adviser if you can, and be prepared to spend at least one hour as you work through your immediate and long-term goals.If you only spend ten minutes setting goals and drafting your plan, you’re not doing it right.

Building wealth is not easy, and it’s even harder if you don’t have a clear picture of your goal, much less a plan. As a mentor once told me, your goal should not be to work hard for the rest of your life, but to work hard now so you can enjoy the rest of your life. Many factors can lead to financial failure, but failing to make a financial plan is one of the (if not the) biggest culprits.

Spread the News: