When it comes to managing your money, many people tend to take the ‘head in the sand’ approach. The whole idea that if you don’t acknowledge something, it doesn’t exist contributes to the fact that we are more in debt now than ever before and it’s honestly scary.
Did you know it would take the average American 11 years to pay off a credit card debt and that’s only IF they stop putting extra purchases on it? And that doesn’t include any other debts, or actually enjoying your money and hitting your financial goals.
That’s right, financial goals. Have you ever really thought about them? What they are and why you need them?
Thinking about our goals in life we don’t often actually make the connection of what these goals represent in terms of money (remember, the head in the sand approach) which means we don’t really have control of our lives or where it’s going. We are reacting to our world instead of being proactive in it.
So how can we change it?
We start setting financial goals for ourselves and even better… we start achieving them.
If you want to kick up your financial goal setting (and achievements) take our free finance goals challenge.
What Are Financial Goals
Financial goals are goals you have that you can put a monetary value towards, or that require some aspect of financial control in order to achieve.
They can be short term goals (make an extra $100 this week) or long term goals (save $40,000 for a downpayment on a house), they can be big or small, they can be part of your day to day life or something you work towards over a longer period of time.
Your financial goals are completely unique to you and your situation. While the overall goal may be the same as someone else (ie; pay off your credit card), the way in which you achieve this goal is going to be different.
It is important that you set your own financial goals as the motivation for you to achieve them needs to come from within. It’s all well and good for someone to tell you that you need to get out of debt, but unless you have the intrinsic motivation to do so, the chances of you achieving that goal are significantly less. Keep in mind when thinking about your financial goals, what it is that you want to achieve (which is something we cover in depth in our Smart Sexy Finance Bootcamp).
Why You Need To Have Them
We are a generation that is known for ‘living in the now’ and the whole ‘YOLO’ and ‘Treat Yo’self’ does nothing to help our ability to manage our money. Around 60% of millennials who are in debt don’t know if or when they’ll ever pay their debt off.
As I said before, we are living a reactive life, that is one that reacts to the events that happen as opposed to a life of intention.
But what does that actually mean?
Living a reactive life financially means you don’t have money in the bank for emergencies, it means you don’t know exactly how much money you have coming in, it means you don’t budget your money and it means you don’t really know much about your debts, when they will be paid off, what the terms of your debts are etc.
It means you’re responding to events as they arise instead of planning for them.
It means when your car breaks down you put the expense on your credit card instead of having money available for the emergency.
It means your money runs out before your next pay and you’re not sure where it went.
It means you don’t know how much debt you’re in, let alone know when you’re going to pay it off.
It means when you want something, you buy it, even if it adds to your debt.
It means you’re not confident with money, you avoid conversations about it or dealing with it because it makes you feel uncomfortable and out of your depth.
When you live a life of intention, and when you are proactive with your finances, you know exactly where you stand financially, you know where you want to be financially and you have a plan of how you’re going to get there.
You don’t need to know all the details, but you know that if circumstances change or something comes up, you can adapt to overcome it because you know your money.
We need financial goals so we are proactive with our money and so we are moving towards what we want in our lives.
How To Create Your Financial Goals
So we know what financial goals are and why we need to have them, but how do we create them? Where do we even start?
The first step is always about figuring out where you are right now. You need to get uncomfortable, stop hiding and work out what your income is, what your expenses are and what debts or assets you have.
Get a big financial overview and see exactly where you stand.
You can use our free Mini Finance Planner to help you do this:
The next step is to work out what it is you want? What do you want in life? How do you want to live your life? How do these goals work with your finances?
Start by coming up with your big goal and work backwards with the phrase ‘in order to achieve this, I need to’.
For example, if your big goal is to save $40k for a downpayment on a house, your work back could look something like this:
I want to save $40k for a downpayment on a house -> in order to achieve this, I need to first pay off all of my debts -> in order to achieve this, I need to work out which debt to pay off first and pay extra towards it -> in order to achieve this I need to rework my budget.
So, goal #1 is to rework your budget. Which is something you can do right now and you’re already achieving your financial goals!
Tips For Creating Effective Financial Goals
There’s no such thing in my eyes as a ‘good’ financial goal and a ‘bad’ financial goal, but there are effective goals and ineffective goals, which you need to be mindful of.
To start with, ineffective financial goals are more like a ‘wish’. They don’t have much substance to them and could be considered something that is said in passing, such as ‘I want to buy a house’. Or, they are a goal you have absolutely no control over, such as ‘I want to win the Lottery’.
Here are some tips for creating effective financial goals:
If you want to achieve your financial goals, you have to be pretty darn specific with them so you know exactly what you’re working towards. Simply saying you want to save for a downpayment on a house isn’t enough.
How much do you want to save? What kind of downpayment are you aiming for here? And are you talking about just the downpayment, or should you be including the other costs involved with buying a house?
The more detail your goals have the better.
Set A Timeframe
So you want to save $40k for a downpayment on a house, which will cover your deposit and all fees and costs associated with buying the home. That’s awesome. By when?
All smart goals have timeframes included, but the key is to make them realistic.
If you earn $50k a year, have $50k in debt and you want to save $40k for a deposit, giving yourself a timeframe of 12 months just isn’t going to work.
Give yourself a realistic timeframe, and for larger goals, set mini ‘checkpoints’ along the way. Perhaps your first checkpoint is to get to $5k savings in 12 months.
Break Down Larger Goals
So you’ve set your goal of $40k downpayment, and you’ve created your timeline to do it. But you’ve still got $50k in debt and there are more steps you need to take to achieve your goal. So break them down.
Use the ‘in order to achieve this, I need to…’ phrase and when you find a sticking point, break that goal off and create more smaller goals around it. For example, your smaller goal here is to pay off your debt first, but in order to do this, you need to rework your budget, earn extra money, make extra payments, talk to your bank about getting a better deal, cancel your credit card and cut unnecessary expenses.
Each of these smaller goals feels so much more achievable than the bigger ones, and by ticking them off we are working towards the bigger goals without feeling overwhelmed.
Have More Smaller Goals Than Bigger Ones
If you have more bigger goals than smaller ones then you aren’t breaking your goals down enough.
Small goals are quick and achievable and they keep us motivated to keep going. When we feel like we are actually ticking things off our list and achieving our goals we are more likely to keep moving forward.
It’s easy to become disheartened with a big goal and give up quickly, but having many smaller goals mitigates this and allows us to feel that much-needed sense of achievement.
What To Do After You’ve Created Your Financial Goals
The next step is simple, once you’ve created your financial goals, it’s time to start achieving them.
Grab your list of small financial goals (the ones you need to do in order to achieve your big financial goal) and do one of these things right now. Yup, right now. You’re here because you want to make your goals happen so what better time to start than right this moment.
It doesn’t need to be anything big, it could be calling your credit card company and negotiating a better interest rate while you pay your card off, it could be sitting down and working out your budget, or it could be analysing where you are financially right now (using our free Mini Finance Planner of course).
Once you’ve done that, keep the momentum going.
You can achieve your financial goals if you’re savvy about how you create them and motivated to achieve them.