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The Importance of Setting Financial Goals

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financial goals

The following is a contribution from Graham at MoneyStepper. If you’re interested in contributing to Frugal Rules, please see our guidelines and contact us.

After finishing university, I managed to secure a place on a graduate scheme at a professional services firm. It was the first time in my life that my salary hadn’t been earned by the hour working in bars, cafes, shops, market stalls and through any other work I could find.

I was excited. Finally, I was going to be earning enough money to start building my financial wealth. I was going to be rich!

However, what it took me many years to understand was that without specific focus on my budget, my goals and becoming wealthier, I wouldn’t progress in my financial life.

Setting a Budget

The first stage of improving my financial wealth was setting a budget. Before this, I’d often set a budget for a specific event (I won’t spend more than £300 at this festival, I need to save £600 for this holiday, etc), but that was the end of my budgeting process.

I thought of budgeting as being something only performed by businesses when trying to obtain funding and by absolute geeks! Well, the latter may be true – but there is nothing wrong with being a geek… 😉

So, after a couple of years of the purse strings seeming very tight every month, I started creating a monthly budget. This was a good start, but didn’t really achieve much by itself.

Change Behavior Based on your Budget

The problem was that I would create my budget at the beginning of the month. Then, at the end of the month, I would record all my purchases and note that I had overspent by 30-40%.

To address my overspending, I would either say “next month I’ll be better”, or I would simply increase by budgeted spend for the following month.

Both of these actions had no benefit to my net wealth.

Luckily, I managed to identify this trend and fix it. I started monitoring my budget weekly to determine how I was performing against my monthly budget. I made a pretty spreadsheet with beautiful graphs (I mentioned I was a geek, right?) 🙂

All of a sudden, because I was focusing on my budget, I started to change my actions during the month to ensure that I met my budget. If I’d had a big spend on a night out, I would have to cancel a night out in the following weeks, for example.

This helped. I was starting to come in under budget each month as it became a competition with myself. Being an incredibly competitive person, I loved that I was winning this competition. This was a brilliant cycle of success as I wanted to beat myself by more each month.

Something Still wasn’t Right

My budget was meaning that I was reducing my spending. However, nothing was really changing in my overall financial situation and I didn’t understand why.

Luckily, I completed my budget one morning before work. My first meeting that morning was with my boss to discuss my progress against my goals. In our business, we set goals for the year at the beginning of June and they don’t get looked at again until the following March.

We then run through each goal and say “oh yeah, I remember that – no, I’ve not achieved this”.

During this meeting, it hit me like a rock. Nothing would be achieved at work, in my personal budget and my life without the following process:

  1. Set SMART (specific, measurable, achievable, realistic and time-bound) goals
  2. Keep these goals at the forefront of your mind at all times
  3. Monitor progress against these goals on a regular basis
  4. Modify behavior in order to achieve these goals
  5. Refine goals on a semi-regular basis as our environment changes

 

Setting Financial Goals

Another thing I didn’t understand in my personal financial life was that setting goals is very different from budgeting. Budgeting takes each area of expense and estimates the amount to be spent each week, month or year. However, it is not inspirational – and aspiration is key to success.

And this is where financial goals come into play.

I now approach this in the following way:

1. I keep a very short-term to do list of actions to be taken each day or week in order to reach my longer term goals – this will usually contain 3-5 very short term goals that will be completed within the next 7 days.

2. I maintain a monthly budget to set and record my short-term goals. My goal for the next month is to only spend X, or to save Y. This is caused by the results of step 1 and will lead to the success of the goals set in step 3 and 4.

3. Annual goals. I also set around 10 annual financial goals which are conducive to increasing my net wealth. My 2014 goals are documented (and reviewed monthly) on moneystepper. Each month, I check my progress and decide whether the goal is still appropriate. Based on successes and failures, I can again modify my behavior each month in order to reach my annual objective.

4. I also have long-term goals. These have a time frame of 3-5 years, and I currently have 4 goals. I would recommend having fewer goals for this objective, all related to different aspects of your financial position. Mine are related to property ownership (both residential and investment), my retirement fund, my passive income streams and my taxable investment accounts. Each has a detailed monthly plan of how I will reach this ultimate goal. However, I only review these goals on a quarterly basis to ensure my overall progress is on track.

5. The dream. The ultimate end. This should only be one single goal. It should be very high level, with a time frame of between 10 and 30 years. Mine is to achieve financial freedom, which I have defined as having (achieved every month for 3 years) truly passive income (the income I would obtain if I just sat on the beach every day) which exceeds my total expenses and my previous salary combined. Therefore, I would be able to pay for my expenses, and then still have enough earnings which would be equivalent to working a full time job.

Results

My results were also immediate. I’m embarrassed to say that I only started to adopt this approach 2-3 years ago. However, as soon as I started making this a priority, my results almost immediately changed. I went from my net wealth staying static, to marking 50-100% increases in my net wealth each year since.

 

How do you define your budget and goals? What impact has it had on your long-term net wealth progress?

 

Photo courtesy of: Sweet Dreamz Design

 

This article was written by Graham from moneystepper.com. Moneystepper provides advice on taking small steps every day, which have a much bigger impact over the long-term. Daily posts cover every aspect of money, investing, saving, real estate, taxes & the economy: everything you need to increase your net wealth in the short, medium and long term.

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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35 Comments

  • Great post and great advice, Graham! If you don’t set goals it’s hard to have financial success, in my opinion. The more time you put into it and the better your plan, the easier it is to gauge your cash flow and make sure that you are spending money on things that you actually care about.

    • moneystepper says:

      Thanks DC and I think that you are absolutely spot on – its not about reducing your spending for the sake of it, its all about making sure you spend your money on the things you care about; the things that make you happy!!

  • I definitely agree that is is incredibly important to have goals if you hope to achieve success financially! As the saying goes, “If you don’t know where you are going, how will you know when you’ve arrived?” We’ve seen MUCH more progress in our net worth and overall financial status since we started setting financial goals for ourselves a few years ago.

    • moneystepper says:

      Great to hear I’m not alone in tracking my goals being the main driver to my progress. Great saying Dee – I’m making my Yakezie member post today on the very same subject!

  • Great post! I was the same way right after college – I had the mentality that I was going to be rich! But you never get there if you don’t lay a good foundation first. Once I laid the foundation, I too see great increases in my annual net worth.

  • Saying that “goals are important” is super cheesey, but soooooooooooo true. Without goals, you’re really just flying blind. We’ve made a lot more progress since we started clearly defining our goals.

  • The only way that I get things done is by setting goals and sticking to them.

    • moneystepper says:

      I couldn’t agree more Michael. Unless I write something down, its very unlikely that its ever going to get done. My fiancée will probably hope that I start writing “do the dishes” down as a goal!!! 🙂

  • Awesome post, Graham!! Yes, it took Rick and I years to understand the importance of setting financial goals, but since we’ve done so, our financial picture gets better and better each month. Woohoo!

  • DEBt DEBs says:

    Good breakdown of how to approach something that can be quite challenging because it’s so personal. I’m embarrassed to say I’ve only been doing this for 2 years also, and probably not to the extent you are. I need to step up my investments game because I’ve been focusing on debt. I find it a bit daunting but will get there, eventually.

  • Awesome steps! I might have to take a few of these and implement them into my life. I’ve definitely fallen off the bandwagon and have noticed that my savings account is not where it should be. It’s easy to keep on going down the route, but I’d rather nip it in the bud and take steps to be much more financially secure in the future.

    • moneystepper says:

      I have found that they have genuinely helped me progress. My net worth has gone from increasing by 0-10% each year, to shooting up by 50-100% each year since I started tracking everything.

  • Love your strategy for goals. I like to set a few short-term goals and one long-term goal. I keep a visual reminder of the long-term goal on my phone screen and in my home. Great work.

    • moneystepper says:

      Good idea Mike. My goals stay inside my spreadsheet – granted I check this every couple of days, but adding a print out somewhere in my home would be a great idea. Thanks for the inspiration.

  • The evolution of your budgeting process is interesting. I think many people go through a similar transition (and the ones who don’t keep spinning their wheels). If you continue to hold steadfast to your budget and ensure its got aggressive but attainable targets, then you’ll accomplish step 5 (the “dream”) before you know it.

  • I’m all about my financial goal setting. The more clear the goal, the easier it is for me to give up the smaller day to day indulgences.

  • I’ve seen a positive difference in my finances since last year when I started to really focus more on my budget and where the money was going.

  • I am a big fan of the SMART goal system applied to your finances. It definitely gives you focus and helps keep you on track as long as you remember to keep reviewing them and not just set them and forget about them.

    • moneystepper says:

      Me too Shannon. Whilst I despise following SMART at work where we are obliged to set about 50 different goals that we can never stick to because there are too many to focus on, I have completely embraced it in my personal life!

  • Derek @ MoneyAhoy says:

    I’ve noticed improvements in my own finances after setting and tracking my goals much more closely. It really is a case of you can’t manage what you don’t measure!!!!

  • This is all great advice for getting a handle on out of control spending. It is certainly one of the best step by step outlines to achieving that goal. But never forget that a big part of the problem is the reasoning behind our goals. Are we trying to be happy by buying stuff we don’t need and that won’t really do the job? I think being honest and clear about what is important to us is equally as important to all these steps. Together both frames of mind are very powerful.

    • moneystepper says:

      Kathy, I have just finished my Yakezie member post. It covers my failures in the past on not defining certain parts of my journey. One point of failure is not understanding or believing WHY you want to get to your desired destination. I hope you’ll find this interesting…

  • I recently set up a savings goal. Prior to that, I just knew how much I was making, and knew I spent significantly less.

    Now I have a major goal, as I want out of the rat race pretty soon. Max out 401K, IRA, HSA, then pay bills, and you only have what is left over.

  • Dude says:

    Not having goals will lead you nowhere, so setting your financial goals beforehand is really the right and first thing that you should do if you want to achieve them.

  • Adam says:

    You’ve reminded me how important it is to set up a budget in conjunction with your other goals. Often I set a goal for one thing or another without consideration of the cost involved in accomplishing the goal. Using some of my financial resources to accomplish my goals may be slowing me down from accomplishing my long term goals. Making and maintaining a budget will help me be more aware of where the money is coming from and going.

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