Everyone has dreams. But to make those dreams a reality, you often need financial resources. For instance, if you’ve always wanted a cottage in Muskoka, you’ll need to save enough money for a down payment and earn enough monthly income to cover your mortgage. That’s where financial goals come into play. In most cases, the achievement of life goals goes hand in hand with the achievement of financial goals. If you struggle with understanding the importance of setting financial goals, keep reading. Your finances affect every aspect of your life. Figuring out how to set and achieve financial goals will lead you to financial freedom. Continue on to learn more!
Table of contents
- How important is financial planning for living a good life?
- Why is it important to set a financial goal?
- The Importance of Setting Financial Goals and How to Set Them
- Setting Financial Goals: General Tips
- How to Set and Achieve Financial Goals
- What is your financial goal and why is it important to you?
How important is financial planning for living a good life?
Financial planning is very important for living a good life, especially considering the economic climate of Canada. Your finances affect every aspect of your well-being and lifestyle. There is a high importance to setting financial goals as well, as this is a critical step of financial planning. Goal setting helps ensure you stay dedicated, on track and remember what is important to you. Living a truly good life means living an enjoyable and meaningful life. To do this, you need to have a baseline of financial security. Financial planning is how you set yourself up for financial security. With planning you can be on the right track for living a good life in 5 or 10 years. Keep in mind that goal setting is important in all aspects of life, not just finances, but everything should work together to help you get where you need to be.
Why is it important to set a financial goal?
You may ask, what is the importance of setting financial goals? It is everything. Money is the baseline of how you get experiences, security, and comfort. Sure, you can be comfortable with less. However, if you don’t value minimalism, you need to set goals to build the life you want which is only possible with certain financial resources.
There are short-term, mid-term and long-term goals. You need to set goals in each category to support your values and needs. Goals can be the tool to becoming debt-free, buying a house, or retirement. Goals can also help you establish the right spending habits for the lifestyle you want to live.
When you decide to manage your money, you make a decision to craft the life you want. Of course, this will not happen overnight. With the right short-term, mid-term and long-term goals, you will get there. Think of it as being about the journey, not the destination. These goals should be in alignment with each other. Financial goals help you match your spending and investing habits. You then obtain the specific financial outcomes you desire.
Goals generally help you get focused, motivated, and have confidence in all your life choices, including personal finances. Financial goals have the benefit of helping support you in multiple areas of your life. Let’s face it, finances and financial health have a huge effect on our social, physical and mental health. If you want to help yourself across the board, sit down and start setting financial goals.
The Importance of Setting Financial Goals and How to Set Them
You must set financial goals if you want to actively create your life, as opposed to life creating itself for you. You probably understand how much money and finances affect your life. Have you ever thought about how every coffee you buy is a choice? Or how committing to every social activity might be overextending your wallet? The truth is we all have simple areas of our lives we can afford to make better choices.
When it comes to money, our lifestyles do not necessarily have to change. Small adjustments produce promising, lasting results. However, any sort of lifestyle change can be hard, inconvenient and at times annoying. For example, addressing lifestyle creep. Setting financial goals will help you align various personal values with habits. Your habits will help you stay on track. Staying on track means hitting your goals and targets.
Let’s check out some of the benefits of setting financial goals:
- Take control of your finances.
- Design a strategy and approach that works for you.
- Progress becomes measurable.
- Your priorities become clear.
- Build motivation and self-esteem.
- Learn to create positive outcomes with what you can control (and what you cannot).
- Goals provide a degree of accountability.
- Your relationship with money improves.
- There is a clear path to the future you want and ability to achieve overall life goals.
Setting Financial Goals: General Tips
You probably understand the importance of setting financial goals by now. But how exactly do you set a financial goal? In the sections below, we’ll take a closer look at how to set financial goals.
Set SMART Goals
The SMART goal method is a widely accepted system for any goals. In summary, a smart goal is: Specific, Measurable, Achievable, Relevant, and Time-Bound. The SMART goal system can be useful with financial goals. It allows you to clearly define a goal, set how you will measure the success of a goal and states a goal is within the realm of achievement. It makes sense as a goal for the creator. Finally, it has a timeline for when it will be or can be accomplished so you can track your achievements. Here is more information on SMART goals, how they work and how to implement them.
Set Short-Term, Mid-Term and Long-Term Goals
There are three timeframes when it comes to goals: short-term, mid-term and long-term goals. You need to work with all these goals to set proper financial goals. These goals should work on top of each other, layered. For example, a short-term goal could be to get out of debt and build an emergency fund. A mid-term goal could be to save a down payment on a home. A long-term goal could be to save $1 million for retirement. You can’t necessarily get to the long-term goals if you don’t first reach the shorter-term goals. The more immediate goals help your bigger and more time-heavy goals.
Let’s take a closer look at each tier of goal below:
Short-term Financial Goals
The timeframe for short-term financial goals is anywhere between 1 day to 2 years. The outcome can be obtained relatively clearly and quickly. Short-term goals should always move you toward your mid-term and long-term goals. A necessary short-term goal is to sit down as soon as possible to create a realistic financial budget, if you haven’t already.
Mid-term Financial Goals
The timeframe for mid-term financial goals is anywhere between 2 years to 5 years. These goals take more time than short-term goals. However, these goals allow you to bridge to your long-term goals.
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Long-term Financial Goals
The timeframe for long-term financial goals is anywhere between 5 years to 20 years, possibly longer. It is a good idea to start with these goals. They give you a clear idea of the life you want in 20 years, then you can work backwards in your goal setting. You can then design your mid-term and short-term goals to get you to your long-term goals. These goals are your biggest goals and take the most time.
Keep your goals written down, on your mind and in conversations
You must document, think about, and talk about your goals. Keeping your goals around you and on your mind will help you stay focused. It will remind you of your values and what you deem important. It will also allow you to collaborate with others on designing goals that work for you both/all. This can include partners or friends you plan to retire with, go on a trip with, or start a business with. This will help you stay accountable and keep you motivated. A goal that is not written down or discussed likely cannot be actioned. Document your journey and talk about it, this way it’ll become a reality!
How to Set and Achieve Financial Goals
Now that you have some general goal setting tips, keep reading to understand the general process of setting goals.
- Step 1: Create and define your goals. You may have to do some “soul-searching” at this stage to determine what you want out of your finances and general life.
- Step 2: Develop an approach or plan on how you’re going to achieve your goals that’s realistic. Often, working backwards from where you want to be to where you are now is the best way to carve your path of least resistance.
- Step 3: Take steps to achieve your goals. At this point, it should just be a matter of following the plan you outlined in the above step. This part isn’t always glamourous or exciting, sometimes it can be quite mundane and boring. But hang in there and remember what you’re working towards!
- Step 4: Evaluate your progress on a periodic basis. For some, they might prefer to check in weekly, whereas others may want to check in monthly, quarterly or even yearly. It really depends on what you’re trying to achieve and your personal preferences. Remember to evaluate both your successes and setbacks. Even if you don’t achieve a goal by the time you wanted to, be sure to appreciate your progress, no matter how small!
- Step 5: Continue to rinse and repeat the above steps. Goal setting is a constant ebb and flow. Once you’ve achieved a goal, take a moment to appreciate your success. Then, set another goal and work towards that. This upward cycle will help you achieve your greatest financial and lifestyle goals!
Financial Goal-Setting Examples
Here are some examples of short-term goals:
- Pay off $4,000 of credit card debt within 12 months using the debt snowball method of $1,000 for a summer vacation by June 15
- Open a TFSA or RRSP account within 2 months
- Start bringing lunch to work, this week, to cut food costs by 20%
Here are some examples of mid-term goals:
- Build and maintain a 6-month emergency fund in 2 years
- Pay off $9,000 personal loan within 3 years
- Save a $50,000 down payment for a home in 5 years
- Save $15,000 for a dream vacation in 4 years
Finally, here are some examples of long-term goals:
- Pay off your mortgage within 20 years
- Generate $5,000 a month in passive income within 15 years
- Save $50,000 for your child’s university tuition within 10 years
- Hit all your retirement targets by the time you are 65
What is your financial goal and why is it important to you?
Only you can determine your financial goals. You can work with professionals to make the tasks simple. However, you will have to determine what is important to you. Figure out where you’d like to be financially tomorrow, in 2 years, in 5 years and even in 20 years. Do you aspire to passive income? Do you want to retire comfortably? Take the time to explore what is important to you. Then create financial goals that follow the SMART method. Start with long-term goals and work towards short-term goals. This will ensure you have your end goals in mind. Remember to be realistic about your circumstances and design goals that are obtainable.
Need help setting goals? Consider chatting with a financial advisor. Fill out this quick questionnaire to be matched with one today!