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How To Set Financial Goals

How To Set Financial Goals

What is your current financial situation like? Does the mere thought of opening a credit card statement send a shiver down your spine or the ringing of your phone trigger a mini meltdown from past collection call harassment?

Of maybe you are very competent with your financial situation and looking to grow this and increase your levels of saving and investing even more.

Regardless of where you are financially, to look to improve this or grow your savings and investments you need to know where you are at, you want to set financial goals and have a plan. Obviously if you are paying your bills on time, have regular savings and a manageable debt situation this is preferable however if your situation isn’t great financially, it isn’t the end of the world (providing you do something about it).

How to set financial goals

1. Know your current financial situation by preparing your own version of a financial audit

Find out exactly where you are financially and make plans to get out of the bad financial situation. List all assets, liabilities (including student debt and debts you owe to friends and family), all your current income (even including small divided streams from small shareholdings you may have).

Next start going through your expenses, what do they tell you, have you been saving any money month to month? Do you have a lot of unnecessary expenses such as clothes that you’ll hardly ever where or direct debits for services that you haven’t used in months? Maybe even worse you are spending more and more money on addictive behaviour that you’ve tried to ignore such as junk food, alcohol, gambling or even drugs. If this is the case please speak to someone about this as soon as possible, even a friend or family member.

2. Work out what your income and minimum lifestyle expenses are

What is your current income? This should be pretty easy to calculate unless you have some convoluted investment structure as it will be what your personal exertion earnings or government aid plus any earnings from investments such as share dividends or rental property income that you may receive.

Next work out what your minimum monthly lifestyle expenses will be. These expenses include shelter, food, basic clothing, utilities, phone/internet essentially expenses that you need to live. Be quite strict with this amount as this will help with your savings potential. Now you need to live a life so you want to have some of your budget allocated towards eating out and entertainment and buying the occasional gift or treat however to build your savings capacity and your investment you will want to maintain a discipline with your lifestyle expenses.

Now you have your current income and your proposed lifestyle expenses, there will either be  (hopefully) a surplus or deficit. If there is a deficit, what further reduction in lifestyle expenses can be made or what additional income can be generated?

3. What does your ideal financial situation look like?

In your ideal life, where are you living? What car are you driving? Where do you holiday? What is your ideal job? Give some serious time to this and write down everything that you want to achieve financially. If you are married or in a serious relationship, these future financial goals discussions should involve them. If the thought of discussing your financial future with your significant other leaves you feeling anxious, scared or angry or this is a topic you try and avoid with your partner then it’s time to address your relationship.

When thinking what you want, think big, really big! We recommend setting long term financial goals such as I wish to own a property in your ideal suburb of your ideal city or the type of car you wish to own or the ultimate job you wish to be working in. Find pictures of the goals that would want to achieve. Find a picture of your ideal car, house, holiday destination, etc.

Even if you are in debt with limited income, try to avoid using this ‘current situation mindset’ when setting your future financial goals. Just because have a low income now doesn’t mean you won’t be able to achieve a larger one in the future. Just because you have no assets now doesn’t mean you won’t have assets in the future. Situations can be temporary so set big financial goals and let’s see if you can surprise yourself and achieve them!

Your current mindset led you to the situation you are in, if you want to change your financial (or any situation) change the mindset.

Once you’ve set your long term financial goals, look to breaking these goals down into smaller, bite sized goals. For example an aim may be to own at least $500,000 worth of shares or managed funds. Breaking this larger goal down into a smaller goal could be investing $500 per month into shares or managed funds. By regularly hitting these smaller goals it won’t be too long before you’ve hit that long term financial goal!

Now we’ve set these goals, the more important part is setting a plan in place and taking action.  What ways are you going to increase your income to be able to fund your long term goals? For example what steps are needed to get you from an annual income of $50,000 to an annual income of over $250,000? Are you taking on extra education, extra skills or even looking to set up your own business?

Are you regularly reviewing your large monthly debits such as home loans and insurances to see if better deals are available? What investment education are you undertaking?

Setting financial goals is one thing, what can we do to stick to these goals?

How to stick to your financial goals

1. Set realistic financial goals in realistic time frames

There’s nothing wrong with setting huge goals, actually that’s to be encourage. The problem is setting big goals in ridiculous time frames. For example if we use the $500,000 investment portfolio mention above, a ridiculous goal (or at least time frame) is to have a $500,000 investment portfolio within a year while only have an annual surplus of $10,000. Short of winning a massive bet or a lotto prize or getting crazy lucky with a speculative share investment, that investment time frame is too short and needs to be adequately set. Set up a plan to reach your financial goals

2. Check in with your goals regularly

For example an annual savings goal of $60,000 is saving $5,000 per month. Now some months might have more bills than other months however after 3 months you should have saved roughly $15,000 and in 6 months you should have saved approximately $30,000 if you are to achieve your annual savings goal of $60,000. By checking in regularly you can see if you are on track or if you need to make any changes (up or down) and set more realistic goals.  You should also be performing an annual more in depth review.

3. Set up an automated finance hub for yourself

The less you need to think about this or the less manual input needed by you, the easier to achieve your financial goals will be. We’ve discussed in detail setting up an automated financial hub for yourself here, however the basic aim is to set up a transaction account (or hub) that your pay is paid into and all your regular debits and bills are to come out of the this account. Then aside from leaving a small balance (to cover double ups or potential debit errors) all monthly surplus is transferred to another savings account (that hopefully pays interest) upon which you put towards investments. You can increase the level of detail as much as you want such as including sub accounts for things like travel, new car, etc

4. Stay disciplined and focused

Life happens! Sometimes you might spend more than you budgeted for or a family emergency pops up that depletes you savings. Don’t let this stop your new financial discipline. Get back on track and keep going. If you find that you are still spending too much, track your spending in more detail through your bank accounts or even set up a budgeting app to help address this. Once you’ve hit one of your smaller goals reward yourself and set another goal more challenging goal that will also help your keep growing and improving. 

5. Look after your health where possible

It’s one thing to stay healthy to maximise your earning and investing potential, you also want to be healthy enough to enjoy the fruits of your labour. Stick to a healthy diet and regular exercise. Health issues are costly both to your longevity and to your bottom line. You won’t be earning the income you could (and should) be earning, your savings won’t be maximised as much as they should be.   

Whether you aren’t in the best possible financial situation or you want to take your savings and investing up another level, you can do this. Find out where you are, figure out where you want to go then take action and stay the course!