Turns out that only 30 percent of Americans have a long-term financial plan in place. But the quality and intent of your goals also matters – so what steps can you take to set “better” personal finance goals?
Let’s check it out…
Why Financial Goals Are Important
First, let’s work to understand why goals are important in the first place.
- Goals provide direction. You want to be rich. Or at least in a better financial position. But so does everyone else. How, exactly, are you going to get there? With goals, you’ll have direction, so you know what to do next to get where you want to be.
- Goals are (somewhat) immutable. Goals can change over time, and sometimes, they absolutely should. But goals are also advantageous because they’re not fickle – they’re not going to change based on your mood or recent setbacks.
- Goals help you measure progress. How do you know if you’re doing the right thing? Or if you’re making any real progress? Goals are incredible for this, giving you an objective metric by which you can evaluate your progress.
- Goals motivate you. For many, goals are a strong motivator. They’re a tool to keep you focused and diligent.
Establish Your Priorities
Before setting any specific goals, you need to know what your main priorities are. For example, is it more important to optimize for long-term returns or short-term cash flow? If you want cash flow immediately, you can invest in a rental property (and hire a property management company, if you don’t want to deal with the hassles), but if you want a long-term return that’s predictable, you might invest in an ETF instead.
Define Your Risk Tolerance
How much risk are you willing or able to tolerate? Generally speaking, the younger you are, the more risk you can tolerate. As you get older, you’ll be increasingly reliant on the savings you’ve accumulated, and you’ll have less time to make up for any mistakes you make, so your risk tolerance necessarily declines. Of course, if you’re setting goals with a long time horizon, you’ll need to factor in the possibility that your risk tolerance is going to change.
Use SMART Criteria
Good goals tend to follow SMART criteria. Though the acronym has changed slightly over the years, and means slightly different things to different people, this is a general breakdown of what it means.
SMART goals are:
- Specific. “Get rich” is not a good goal. “Accumulate $1.2 million” is much more specific.
- Measurable. How can you tell if you’ve reached this goal? What’s your barometer for success?
- Achievable. “Become a billionaire” is not realistically achievable for most people. Set something you can actually reach.
- Relevant. Your goals need to be relevant to your risk tolerance, personal situation, and personal preferences. Don’t set goals for someone else.
- Time-bound. What is your deadline for achieving this goal?
Start With Long-Term and Big Picture Goals
Your entire plan should revolve around long-term and “big picture” goals. In other words, where do you want to end up? Are you hoping to retire by age 50 with millions of dollars in the bank? Or do you just want to climb out of debt by the time you’re 35? Either way, you need to be thinking years or even decades in the future.
Break Things Down Into Actionable Steps
From there, you’ll need to break those long-term goals into smaller, more digestible goals. If you know where you want to be in 20 years, what can you do in the next year or two to take a step closer to that destination?
Write Down Your Goals
Do you want to take your goals more seriously? Do you want to prevent yourself from changing or forgetting those goals? One of the best things you can do is write down your goals on paper. It’s going to make your goals stickier – and provide a visual reminder of what you want to achieve.
Set Rewards for Achievement
You’ve achieved one of your short-term, smaller-step goals toward financial progress. Congratulations! How are you going to celebrate? Establishing rewards, even small ones, for completing your goals will keep you motivated in pursuit of your bigger goals.
With better personal finance goals in place, you’ll have better chances of getting through a financial emergency, affording the luxuries you’ve always wanted, and possibly even retiring early. It’s not an easy or straightforward path, but it is achievable with the right mentality.
The post Strategies to Set Better Personal Finance Goals originally appeared on Ask Dave Taylor.