4 Things I Consider Before Setting a Financial Goal

Setting financial goals is important. After all, if you don't have any objectives you're working toward, it's much harder to make wise decisions when managing your personal finances. You're also less likely to accomplish big things if you don't have a specific plan for what you want to have happen and how to get there.

I don't want to just set goals and fail to follow through, though, as that could get discouraging and make it less likely I'll be able to end up where I want to financially. To make sure this doesn't happen, there are four things I always consider before setting a financial goal. Here's what they are.

1. How excited am I about the goal?

The first and most important thing I always consider is whether I'm excited about what I'm hoping to accomplish. I've found I always do better at working toward something if it's an objective I really want.

Obviously it's more fun to save for things like a vacation than to save up three to six months of living expenses for an emergency fund. But I realize I have to set practical goals too. So, when I'm trying to put money in savings for something boring like a car repair, I know I'll have to work harder to succeed.

If you're setting your own goals, think about your motivation level. When possible, try to frame your objective as something you're excited about (so, for example, saving for car repairs could be reframed in your mind as saving to be able to drive yourself and your kids safely on a road trip). If you can't do that but the goal is an important one, try giving yourself little rewards after you hit certain savings milestones.

2. How long will it take me to accomplish?

Next, I think about my timeline. This helps to define exactly what I need to do to achieve what I want. For example, it's less helpful to say my goal is to save for a down payment than to say I want to save for a down payment to buy a house in two years.

By clearly defining when I need the money saved, I can create a sense of urgency. I can also use a calculator, like the one at Investor.gov, to figure out exactly what I need to do to stay on track for my goal. For example, if I needed to save for a $30,000 purchase in three years, I'd be able to figure out that I must save $833.33 per month. This gives me something specific to aim for.

If you're setting goals, be sure you have a timeline too. Otherwise, they aren't really goals so much as vague wishes for the future.

3. Do I have a reasonable chance of success?

After defining what I'm trying to work toward and how long I have to do it, I take the time to carefully think about whether I have a reasonable chance of success. If not, it's pointless to set the objective.

For example, if you set a goal, like mentioned above, to save $833.33 per month, but that would eat up all your spare cash, you're very unlikely to succeed. If you don't think you have a realistic chance of doing what's needed, you'll want to revise your goal ASAP so you can work toward something practical.

4. What are the opportunity costs?

Finally, the last step is to think about what I'm giving up by working toward a particular goal. See, like most people, I don't just have an unlimited supply of money. If I devote money to, say, a vacation fund, that means I can't put it into a retirement account or save for kids' college funds.

Now, that doesn't mean I won't save for vacation or other fun things. I definitely do. I just think it's important to make an informed choice about how to divide up my dollars after thinking about what else I'm giving up. You should do the same so you make sure you're really using your money for things you value the most.

These four steps have worked well to help me set goals I actually achieve. Give them a try to see if they can work for you, too.