The What, Why and How of Setting Financial Goals

Setting a financial goal can be simple. You just decide what the goal is and when you want to achieve it by. Done. Goal set. Unfortunately, you’ve only decided what you want to do. Not why or how. Unsurprisingly, your chances of reaching that goal aren’t great at this point. To increase your chances of reaching any financial goal it helps to have a what, why and how in place.

What

Deciding what you want to do is the simplest step of the goal setting process. Maybe, by the end of the year you want to:

• Save $10,000
• Eliminate debt
• Double your passive income from your side hustle

As long as your goal is specific, measurable and time bound, it qualifies as a goal. The SMART goal enthusiasts will note I haven’t said it needs to be achievable or relevant. That’s because, to simply qualify as a goal, it doesn’t. As long as you’ve decided what you want to do, when you’ll do it by, and how you’ll define (or measure) what you’ve achieved, you have a goal.

Why

Knowing why you want to achieve a specific goal gives you your motivation. Most of us set financial goals in order to improve our finances, but the why for each goal will be subtly different. There may be several ‘whys’ for you, and they’ll probably provide you with a mix of emotional and practical motivations. Let’s look at a couple of examples.

Goal #1: Eliminate all debt by the end of this year.

Why would I want to do that?

• To live a happier, less stressful life, without the worry of debt hanging over me
• To have a lower debt to income ratio and credit utilization ratio, to increase my credit score
• To save money on interest payments
• To start putting the money going to repayments into other things, like investments, savings or having fun

Now I have not one but four whys, emotional and practical.

Goal #2: Save $50,000 for a down payment on a house

Why would I want to do that?

• To have a lovely, safe, cozy home I can call my own
• To save money on renting and invest it in a property
• To rent out in the future so I can travel for a year
• To provide a home for a future family

These may or may not be your whys, when it comes to home ownership, but each why is either emotional or practical. What’s more, they help clarify the details of your goal somewhat. If you want to rent your home out and travel you need to set up your finances so that can be done. That is, the rent coming in would have to cover your mortgage and leave some money over to help support your travels. Thinking about a future family? That will help you decide exactly what type of home you need, identify how much it will cost, and make sure your down payment goal is practical.

How

Knowing how you’ll achieve a specific goal gives you your strategy. It should be specific, and just like your ‘whys’ you might need a few different ‘hows’ to help you reach that goal. Whatever your financial goal might be, typical hows include:

• See a credit counselor
• Set up a savings account
• Make a budget
• Stop impulse spending
• Get a second job
• Start a side hustle
• Reduce expenditure
• Have a no-spend month (or year)
• Research investment opportunities
• Increase passive income

Some of these hows will require a further breakdown, some won’t. Make a budget is straightforward enough. Something like start a side hustle, reduce expenditure, or increase passive income will require a set of hows of their own.

Getting your what, why and how list in place for each goal will make a significant difference in how easy it is to reach your goals. Even the most seemingly unachievable goals may seem a little more realistic with a what, why, how plan in place.

 

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen