Setting goals is important in pretty much all aspects, but especially when we’re talking about personal finance. Without a goal, everything you’re doing is akin to an aimless journey, with no destination in mind.
If you really want to reach your financial goals, you have to learn how to set them properly. Here’s how to set your money goals in 2020 to finally achieve that sweet financial freedom!
1. Make it SMART
The first thing you have to do when setting a goal is to determine whether it fits the definition of a SMART goal first. SMART refers to Specific, Measurable, Achievable, Realistic, and Timebound. Experts say in order for a goal to be successful, it has to satisfy all five of these requirements first.
What it isn’t: “To have lots of money.”
What it is: “To have $100,000 in my emergency fund account.”
You have to make your money goal specific in order to focus on achieving it. You can also use the 5 ‘w’, who, what, when, where, and why to make it as specific as possible.
What it isn’t: “To become rich.”
What it is: “To have a net worth of $1 million.”
Make sure that you put your goal in measurable terms, perhaps by attaching a numerical amount to it. After all, you can’t measure your goal, how will you know that you’ve already reached it?
What it isn’t: “To purchase Amazon from Jeff Bezos.”
What it is: “To purchase a house in California.”
If you really want to have a shot of achieving your goal, you have to make sure that it’s achievable in the first place. Now, purchasing Amazon from Jeff Bezos is not entirely impossible, but it’s too lofty a goal to start with.
What it isn’t: “To pay off $30k of debt in 1 year with my $20k income.”
What it is: “To pay off $10k of debt in 1 year with my $40k income.”
Another requirement for setting a good goal is to make sure that your goal is realistic. Of course, nothing’s completely impossible, but unless you get a windfall such as winning the lottery or receiving an unexpected inheritance, there’s no way you can pay a $30k debt if your total earnings for the year add up to $20k. It’s simply not mathematically possible.
What it isn’t: “To become financially free someday.”
What it is: “To become financially free by the time I’m 50.”
If you don’t set a timeframe for your goal, you’ll be waiting your whole life for something that may or may not happen. But if you set a timeframe, you can at least
2. Break it down into small steps
After figuring out your money goal through the help of SMART guidelines, it’s now time to break it down into smaller goals.
For example, let’s say your goal is to have a net worth of $1 million by the time you’re 40. You can make your goal a lot more achievable if you can break it down into ‘steps’ first.
If you’re currently 25 with a net worth of $10,000, that means you need to earn at least $990k in 15 years. If your current salary is $60k a year, you won’t reach $1 million in 15 years even if you save all your income. So now, your goal is going to look something like this:
- Have a $1 million net worth by the time I’m 40
- Have an emergency fund worth $100k by 28
- Be earning $100k annually by the time I’m 30
- Have a savings account worth $200k by 35
And so on. Do you see how breaking it down can help? Consider these smaller goals the layovers before you can reach your final destination.
3. Write it down
Lastly, writing down your money goals helps greatly in achieving them. In fact, according to a study led by a professor at Dominican University, California, people who write down their goals are actually 42% more likely to achieve them.
Why is that? Well, you know how ideas can be so fleeting sometimes. One moment you’re thinking something, the next you’ve already forgotten it. By writing your goals down, you’re solidifying them and letting your brain remember that you have to work on reaching them. Putting them down on paper also allows you to strategize better on how you can achieve your goals.