Americans who have a written financial plan are far more likely to pay bills on time, to have an emergency fund, and to feel financially stable. Yet in 2018, just one in four Americans responding to a Charles Schwab survey had assembled one.
The success brought by having a budget is no surprise. Research has shown that setting goals is essential to achieving success in every aspect of life -- including finances. But it's not enough to simply set goals -- you need to make sure you're setting the right goals, that you're tracking your progress, and that you're taking the necessary steps to set yourself up for success.
If you're not sure where to start, this guide on how to set and stick with financial goals in 2019 can help you identify the objectives you want to achieve, make sure they're designed to maximize your chances of success, and help you stay on track for achieving your aims.
Why is setting financial goals important?
Goals give you something to work toward and help you to stay motivated. Saving money and planning for a secure financial future is hard. It requires sacrifices; you can't buy everything you want, and you may have to work harder to earn extra income. Unless you have a clear reason -- a Big Why -- for those sacrifices, you're far less likely to be able to do the hard work necessary over the long term to achieve big things.
Research has found that:
- Having goals improves performance. People who set specific, measurable goals are more likely to achieve them.
- Having goals sets the standard for satisfaction. Once you've set a goal, you won't be happy unless or until you achieve that goal. Your happiness comes to depend upon accomplishing your aims.
- Goal-setting focuses your attention. When you've set a goal, you devote your efforts to achieving it, and your focus shifts away from other things.
- Goal-setting energizes you. When you have a goal set, you're excited about achieving it. You want to be proactive in moving forward with fulfilling your objective.
- Goal-setting helps you track your progress and measure success. When you've established specific goals for yourself, you can determine more easily if you're on track to achieve them -- and you'll know when you've succeeded.
- Goal-setting affects your persistence and keeps you motivated: You'll work harder to achieve specific goals you've set for yourself, and you'll be less likely to give up before you've accomplished the things you set out to do.
- Goal-setting reduces the chance of failure: When you have a specific goal, you're much more likely to persist until you achieve what you planned.
Many of the most important financial objectives you'll need to fulfill in your life -- such as saving for retirement or saving for a house -- could take months, years, or even decades to achieve.
Without specific goals, it's tempting to fall into bad habits that develop rather than persist over time to achieve these big objectives. But when you have a specific financial goal, you're more likely to keep up the good habits necessary to achieve it. You can track and measure your progress, and you'll stay motivated over time because achieving your goal will become necessary for you to be satisfied with your financial life.
You need both long-term and short-term financial goals
Chances are, you have many things you hope to achieve financially. To make sure you become a success with your money, you should set both short-term and long-term financial goals. In fact, it often makes sense to break the latter down into smaller, more quickly achievable objectives so you can more easily track your progress and score fast wins.
Having long-term financial goals is essential because:
- You need to look at the big picture. Many of the things you'll want to accomplish financially are going to take years -- perhaps a significant portion of your lifetime. You need a big-picture view of what you want your financial life to look like so you can define success.
- You need to know your big objectives in order to establish smaller ones. If you know the big things you want to achieve, you can break those large goals down into smaller, more measurable tasks. In doing so, you ensure that those short-term goals you set for yourself are helping you succeed at the big things.
- You need to get on the same page with your partner. When you're sharing your life with someone else, you both need to be committed to making the financial decisions necessary to achieve big things. It's important to know what you both desire so you can decide how to allocate your dollars and which goals you should work toward achieving. It's often easier to talk about these big life objectives than to deal with day-to-day money issues, and achieving consensus on the big goals can help you reach compromises on how you handle money in every aspect of your life.
Having short-term goals is also important because:
- You need to score quick wins to stay motivated. Research has shown people are more likely to be successful in achieving a financial goal, such as paying off credit-card debt, when they achieve something fast. If you set goals you can achieve quickly, you'll be much more likely to make the financial sacrifices necessary to be successful at your objectives.
- You can more easily track your progress: If you have a savings goal you can achieve within a year or two, it's much easier to make sure you're on track. The same can't be said for a goal that won't be achieved for a decade.
- Short-term goals stave off common money problems. In many cases, people end up in debt because they don't have the money to cover bigger expenses, such as home repairs or a vacation. If you can set short-term goals to save up for these expenditures, you can improve your overall financial picture by avoiding borrowing.
How can you set effective financial goals?
Knowing that you should have financial goals isn't enough to ensure you have the right ones. It's also important that the goals you set are effective. They need to motivate you, cause you to alter your behavior, and keep you focused on achieving them.
The good news is that there are proven techniques for goal-setting that will help you do it right. One technique is to set SMART financial goals. SMART is an acronym that stands for Specific, Measurable, Attainable, Relevant, and Time-Bound.
1. Setting specific goals
Setting specific goals is important so you'll know exactly what steps you need to take to achieve them. For example, a vague goal such as "save money" or "save for a down payment" doesn't do you much good. It doesn't specify what the amount of that down payment will be, how much you should save, or by when -- in short, there's no definition of success.
Instead, you'll want to decide exactly what you need to do to accomplish this goal. For example, you could decide that your long-term goal is to save $60,000 for a down payment in three years. Then you can get even more specific: Saving $60,000 in three years would mean saving $20,000 per year, $1,666 per month, or $385 per week.
Obviously, it's a lot easier to determine whether you're saving $385 per week than to determine whether you're amorphously "saving for a down payment." The specificity gives you something to work toward, you can track your progress easily (where did I come in relative to $385 this week?), and you can motivate yourself to cut specific costs or to take on a side hustle in order to increase your income by a specific amount to hit this goal.
2. Setting measurable goals
Making your goals measurable is also important, for many of the same reasons: It's easier to stay motivated and to evaluate success when you can ascertain whether you're making progress toward achievement.
You don't want to just set a goal of "spending less," or "save money" for example -- if you don't know how much you're spending now, or how much you want to cut, you won't know whether you're succeeding. Instead, you could specify that you want to cut your spending by $50 per week. This is a specific, measurable goal -- you'll know what target you want to hit. As long as you track spending both before and after you set your goal, you'll be able to measure exactly how close you're getting to saving that $50.
3. Setting attainable goals
While you can and should push yourself, you don't want to make your goals so unrealistic that you have no hope of achieving them. If your goals seem so far out of reach they might as well be impossible, you're less likely to even try. And if you fail to hit such unhittable targets time and time again, you may decide achieving your financial dreams is hopeless, leading you to just give up and resume bad money habits.
To make sure your goals are attainable, you'll need to have some idea of what your financial situation is before you start working toward your objectives. If you currently have $10 extra in your pocket per week and you set a goal of saving $385 per week toward your down payment, it's likely going to be impossible to achieve this goal unless you know exactly what drastic lifestyle changes you're going to make to succeed, such as picking up a side hustle to earn extra income.
So, as part of your goal-setting process, it can be helpful to track your spending for at least a month to see your current financial standing. You should also evaluate your current savings and investment accounts when you're setting savings goals, because your starting point will make an impact, too. If you already have $15,000 saved and you want to hit a goal of saving $20,000 by the end of the year, it'll be much easier to achieve your goal than if you're starting from $0.
4. Setting relevant goals
You'll be motivated to achieve your goals only if those goals matter to your life and you actually care about being successful at achieving them. If you don't care about buying a house, it makes no sense to set a goal to save for a home down payment because you aren't going to be excited when you see that down payment account growing.
To makes sure the goals you set are relevant to you, write a list of all the things you hope to achieve in the next year, five years, 10 years, and throughout your life. This list could include things such as taking a vacation, buying a house, replacing your car, accumulating an emergency fund, becoming debt-free, opening your own business, retiring at 50, or paying for your kids to go to college. Once you've got an idea of what you hope to accomplish one day, you can begin to break down these objectives or life plans into specific, relevant, and measurable financial goals.
When you have a partner you're sharing your life with, it can be much more difficult to determine whether a goal is relevant to both of you. This is why it's important to get on the same page, so you aren't pressuring your partner to make financial sacrifices to achieve goals they don't care about.
If you and your partner can't agree on a financial goal -- such as cutting spending or committing to save money for a vacation or a big purchase -- you'll need to have a discussion about whether that goal should really be a shared objective. You may need to convince your partner why the goal is really important to you, or find a compromise and set goals that you can both agree on.
5. Setting time-bound goals
Many people are natural procrastinators, especially when it comes to doing difficult things such as cutting spending or paying off a credit card. If you don't set a deadline by which you plan to achieve your goal, you're much less likely to work toward it aggressively when doing so requires sacrifice.
Setting a time deadline for achieving your goals can also help you to make those goals more specific and to more easily measure your progress. If you say you want to "save an emergency fund of three to six months of living expenses," but don't set a deadline for doing so, technically you could feel you're doing fine if you save $10 a month in your emergency fund account -- but it would take you forever to achieve your goal at that pace.
To set a time limit for yourself, figure out when you hope to accomplish your objective. If you want to buy a house in five years, your deadline for saving your down payment is five years in the future. You can use this info to set specific, measurable goals for yourself and to make sure your objective is actually attainable within five years.
If your time deadline is far off in the future, you may want to break your big goal down into a series of smaller goals with specific timelines. If retirement is 15 years in the future, you may decide to set a goal for yourself to save $10,000 each year for the next 15 years to build the retirement nest egg you desire. By establishing a long-term timeline for your big goal, it's easier to determine the timeline for the short-term objectives you're hoping to achieve.
Most common financial goals
It's important to consider all of the financial objectives you most want to achieve so you can set financial goals that are specific to you and that excite you. If you're not sure where to start, here are some common examples of financial goals that may entice you:
- Saving for retirement. You may have a final number in mind. If so, you can work backwards from there to determine how much to save each year. Or, you may make it a goal to max out your 401(k) or IRA each year, or to save 15% of your monthly income. As always, follow the SMART rule for setting goals. A good example of a retirement savings goal would be to save $10,000 each year for retirement, which translates to about $834 per month, $192 weekly, or $27 per day. The specific savings goal you need to set will depend how old you are when you start saving, how much money you hope to have in retirement, and how much it's attainable for you to save.
- Saving for a down payment. In December 2018, the median sales price of a new home sold in the U.S. was $318,600. A 20% down payment on a home at this price would be $63,720. So, if you hope to buy a new home in five years, you could set a goal of saving $63,720 by the end of five years, or $12,744 annually.
- Saving an emergency fund. You should ideally have three to six months' worth of living expenses saved for emergencies. If you spend $3,000 monthly and want to set aside three months of expenses by the end of the year, your goal may be to save $9,000 over the next 12 months. This would be about $750 monthly.
- Saving for college for your kids. If you don't want your children saddled with student loans, set a goal to save for their college education. The amount you'd need to save would depend upon the number of kids you have, the years until they attend college, and the type of college they'll likely attend (a state or private school). You may decide, for example, to set aside $5,000 annually in a college savings fund starting from the year your child is born.
- Saving to pay cash for a car. Continually having a car loan can derail other financial goals. If you want to escape the car-loan trap, you may decide to set a goal to save up for a $15,000 used car to purchase in two years, when your current vehicle will need to be replaced. This would mean saving $7,500 per year, or $625 per month.
- Paying off your debt and becoming debt-free. If you have consumer debt, such as credit-card debt, medical debt, personal loans, or payday or car title loans, it's a good idea to pay off what you owe ASAP to save on interest and free up cash for other things. You could set a goal to become debt-free in one year, two years, five years, or 10 years, depending how much you owe. If you have $10,000 in debt at 10% interest and want it paid off in 24 months, your goal might be to make $475 monthly payments toward your debt so you can become debt-free at the end of two years' time.
- Save for vacation. Instead of charging your family's vacation this year, set a goal to save up enough to cover the cost in cash. If you'll need $3,000 at the end of six months to take your annual summer trip to Disney, that would mean saving $500 monthly to hit this goal.
You can, and should, have multiple financial goals you're working toward over time, because there's probably a lot you hope to accomplish with your money. Just be sure you don't set so many goals that you become overwhelmed and can't achieve them all. And remember to follow the SMART rule to make sure each goal is specific, measurable, attainable, relevant, and time-bound.
How can you make sure you're on track to achieve your financial goals?
Once you've set your goals, you need to ensure you're actually going to be successful at achieving them. Some of the key ways to make sure you hit your targets include the following:
- Set a budget. You need to know where your money is going so you can make sure you're putting enough of it toward each financial goal. Having very specific goals helps with this because you'll know how much to budget each week or month to hit your target. You can be as specific or as vague as you want with your budget, as long as you ensure you're allocating enough cash to achieve your objectives.
- Automate your efforts. You're much more likely to succeed at your financial goals if you can set up automatic transfers, so that on payday, the appropriate amount of money for each objective gets placed into each fund. For example, you may decide to set up an automatic transfer each payday to your retirement fund, down-payment fund, emergency fund, and vacation fund. That way, the money goes where it needs to before you get a chance to spend it and veer off track. Of course, this technique only works if you have a budget and know you have enough money available to transfer the necessary funds to your goals while still covering essential living expenses.
- Remind yourself of your objectives. When you've set goals, you have something you're working toward to make all the sacrifice worth it. So remind yourself of this! Put a picture of your dream house in your wallet so you'll see it every time you pull it out and are tempted to spend, or make your computer desktop background a picture of a beach so you can remember you're doing that overtime because early retirement is important to you.
- Maintain separate savings accounts. It's a good idea to have a different savings account for each different financial goal you have. If you're saving for retirement, ideally you'll want your funds in accounts that provide tax breaks, such as a 401(k) or IRA. But for other savings goals, open a high-yield savings account with a reasonable interest rate for each objective -- such as a vacation fund and an emergency fund. You can more easily track your progress that way, and you're much less likely to misuse money earmarked for a specific purpose.
- Track your progress. You should check in regularly -- at least once a month -- to make sure you're hitting your objectives and are on track for achieving your goals. This is where having specific, measurable goals becomes important. If you know you're supposed to save $10 a day to hit your objective, it's the 15th of the month, and so far you've saved nothing, you clearly need to make some big adjustments. You can track your progress in lots of different ways -- on a spreadsheet, for example, or via apps such as Mint. You can also use visual aids. If you want to save $500 a month, make a "thermometer" at the start of the month that shows $500 broken down into $25 increments. Each time you put $25 into your savings account, color the "thermometer" up to that incremental line. Or make a paper chain with with 50 links if you're trying to pay off $1,000 in debt, and take a link off each time you pay $20.
- Enlist a buddy. Research has shown that when you share your goals with others and check in on your progress, you're much more likely to stay motivated because you feel as though someone is holding you accountable. Enlist your spouse or a friend, and check in once a week or once a month with your accountability partner to report on your progress.
- Make adjustments. If you're consistently failing to hit your financial goals, you'll need to reevaluate. There may be big lifestyle changes needed, such as picking up a side hustle to get extra income. Or you may not have made your goals attainable, so you may need to adjust your objectives.
- Reward yourself for success. When you hit a major milestone, give yourself a reward. This might be a day at the spa or splurging on a $100 purchase or treating yourself to a nice meal. The key is to make achievement a celebration.
It does you little good to set goals that you won't actually take steps to achieve, so make sure you do these things to hold yourself accountable and stay on track toward accomplishing your objectives.
You can achieve your financial goals, but you have to set them first
So, now you know why you set financial goals: to stay motivated, to track progress, and to maximize your chances of success. You know how to set financial goals: Make them specific, measurable, attainable, relevant, and time-bound. And you know how to stay on track to achieve them: by tracking your progress, holding yourself accountable, and enlisting the help of a friend to check in on your efforts.
Hopefully, you're ready to get started with setting some goals of your own for the rest of 2019. If you start today, you're likely to end the year in a much better financial position than when you started it.