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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.
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.
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.
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.
About the Author
I’m a freelance writer specializing in online business, personal finance, travel and lifestyle. I also work as a content creator for hire, helping brands and businesses tell their stories, grow their audiences, and reach their ideal customers. I’ve lived, worked and studied in six countries, across three continents. Stop by my blog TheSavvySolopreneur.net to learn how to run your own (very) small business on your own terms. You can also connect with me at my website KarenBanes.com or follow me on Medium.com.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.