Whether you wanted to start investing, put more money towards debt repayment or save for a special occasion, a few pounds today can add up to a lot of money down the road. Setting specific financial goals is needed to make sure you end up where you want to be.
In this article, we’ll cover powerful reasons why setting financial goals is important while providing you with tips on how to set goals you can achieve.
What are financial goals?
Financial goals are the specific objectives you decide when it comes to your personal finance. Your goals are unique to your money circumstances, and they give you defined targets to aim for. They represent the ideal outcome of your financial decisions over the short, medium or long term.
Here are a few examples of financial goals:
- Building a 3-month emergency fund by the end of the year
- Saving £7,000 for a wedding within 12 months
- Paying off £1,000 of debt within 4 months
- Saving an additional £10,000 in 18 months to be able to afford a bigger mortgage
- Earning an additional £500 per month from a side hustle for the next 6 months
- Become financially free within the next three years
Like the goals listed above, your financial goals should be SMART – specific, measurable, achievable, realistic and time-based. They should also be meaningful and relevant to you and where you want to be in the future.
It’s also worth setting short-term, mid-term, and long-term goals in order to stay on track with your financial targets.
6 powerful reasons why setting financial goals is important
Establishing financial goals is an essential step towards money success, stability and security. Therefore, it’s no wonder setting goals is one of the main success habits that self-made millionaires swear by. When you decide how you’re going to manage your money to achieve the life you want, you begin to align your actions with your goals. This is how you set your actions in motion toward a specific outcome.
To further understand the importance of financial goals, here are seven reasons why you should set goals and how they’ll help you achieve success.
1. Financial goals help you identify where you're going
Ask yourself what you are trying to achieve and how you will define success. Establishing financial goals will help you to answer both of these questions. Once you have your answers — which are unique to you and your personal circumstances — you will know what your end goal is.
We are all able to make changes in our lives for the better, and with an end goal to work towards, making the right money moves become much easier.
2. Financial goals allow you to create a plan of action
Once you have defined your goals and where you want to be, you’ll be able to create a realistic plan to achieve them.
For instance, let’s say you have a medium-term goal to save a £25,000 house deposit in 3 years. You would break down this big goal into smaller targets along the way. For example, you could break this down into a monthly saving target of £694. Smaller goals and milestones help you guide your financial decisions.
These goals will also help you determine the tools and methods that would best support your efforts in reaching them. These might include cutting expenses and increasing your income by picking up a side hustle. You might even want to consider new ways of saving and budgeting such as budgeting apps, no-spend challenges or kakeibo budgeting method.
3. Money goals helps you to stay focussed and motivated
Another immense reason why it’s important to set financial goals is that it helps you to keep your mind on the prize.
It’s surprisingly common to avoid setting goals because of fear of failure to reach them. However, failure is often a necessary step to success and offers valuable lessons. As you face unexpected difficulties on your financial journey, your final goals provide the motivation to keep moving forward.
When you establish clear goals, you also create clarity about your future. And when you have a good idea of where you want to be, you’re more likely to start taking action and stay on track.
4. Goals allow you to track your progress
Having clear goals also includes establishing benchmarks for achieving the goals in due time. When you have a realistic destination in mind, it’s much easier to keep track of all the milestones you may or may not be hitting along the way. Seeing your successes throughout the journey – not just in the end – can drive you to keep moving forward. These victories, both large and small, can be significant. On the other hand, noticing where you may have missed the milestones can allow you to make changes, reprioritise or plan a more effective strategy.
5. Financial goals provide accountability
When you have specific financial goals, you have something that you are accountable for. Therefore, accountability is important when it comes to goal setting because it establishes responsibility. Ultimately, it’s up to you to achieve them. Knowing this creates a sense of ownership and liability that contributes to a successful outcome. Writing down your financial goals and reading them regularly is also a powerful habit to practice. This helps you to make your goals more tangible and to always keep them on top of your mind.
6. Goals improve your chances of success
As mentioned before, setting financial goals provides the clarity needed to build the kind of life you want for yourself. If you don’t define the outcomes you want, your journey towards financial freedom will be significantly more difficult.
As they say, a dream without a plan is just a wish. In other words, if you’re only dreaming about what could be but never take action, you’re leaving it to circumstances to determine if your dream will come true. And as we know, money won’t just appear in our bank accounts with no effort made.
As Napolean Hill said in his book Think and Grow Rich, defining your goals drives you to take action so your chances of reaching them greatly increase. Once you’ve charted your course to achieve them, you set yourself in motion toward a successful outcome.
How to set financial goals
Now that we understand why setting financial goals is essential, here are six steps to get started with goal setting:
- Figure out what your priorities are and write them down.
- Categorise your goals into short, mid and long-term goals.
- Apply a SMART goal strategy. In other words, ensure your ambitions are Specific, Measurable, Achievable, Relevant, and Timely. SMART.
- Create a realistic budget. Understanding what’s coming in and what’s going out, then work it to address your goals. Use your budget to plug leaks into your personal finances.
- Have any money allocated to your goals automatically directed into a separate account (such as a saving or investment account) or cause (debt or mortgage payments) designed to address the first priorities in your list of goals.
- Monitor your progress to ensure you are hitting certain benchmarks. If your hit your benchmark, take some time to re-evaluate what went wrong and how to improve.
The importance of financial goals
As you can see, there are a lot of ways to go about setting personal finance goals as well as a lot of benefits that come with planning. The important thing is not necessarily how you do it, but that you get started. First, make the effort to create financial goals and a plan. This will help guide your financial decision-making and improve your financial outcomes. Then, use the momentum you have gained to continue making progress and keep working towards your goals and final destination.