How to Set Financial Goals and Achieve Them

Idea-Plan-ActionSetting financial goals is like planning a road trip. You need a map, a destination, and a plan to get there. Whether it’s a short drive to the next town or a cross-country adventure, having a clear idea of where you want to go makes the journey smoother and more enjoyable.

Let’s talk about setting financial goals and how small, practical steps can lead to big changes in your financial future.

Your goals need to be SMART Goals
smart goalsSpecific: What will you achieve?
Measurable: How will you decide if you have achieved your goal?
Achievable: Can you actually do this?
Relevant (Realistic): Does this really matter to me?
Time-bound (Timely): When exactly will this goal be achieved? Is this an appropriate time to do this?

Steps to Achieve Your Goals

Step #1:

Brainstorm your goals. What exactly do you wish to achieve? Debt reduction? House down payment? Vacation travel? Education? Retirement savings? Other? List them all.

Step #2:

Define your time horizon. When will you be done?

  • short-term – complete in a day to a year
  • medium-term – complete in one to five years
  • long-term – more than five years – could be 10, 20 or 40 years

Step #3:

Select one goal for each time horizon.

Step #4:

Rewrite each goal using the SMART Framework.

Step #5:

Identify milestones and immediate steps. This is especially important for medium to long term goals. Break them into achievable, time-bound steps. Done in a day is best. Some may require longer, but try to find a step you can celebrate each month. Larger milestones may warrant larger celebrations.

Short-term Goals

Short-term goals are the immediate things you want to achieve within a year or less. These goals set the foundation for your financial well-being. Let’s start with two essential short-term goals: building an emergency fund and paying off small debts.

Emergency Fund

An emergency fund is your financial safety net. It’s the money you set aside to cover unexpected expenses like car repairs, medical bills, or a sudden job loss. Here’s how you can build one:

Set a Target Amount:

Aim to save at least three to six months’ worth of living expenses. If your monthly expenses are $2,000, your goal should be between $6,000 and $12,000 in a separate account. Think about how long people were unable to work and without a paycheque during covid. I believe in preparing for the worst, that way I am always ahead of the game.

Start Small:

savingDon’t be overwhelmed by the target amount. Start by saving a small amount each week or month. Even $20 a week adds up to $1,040 in a year.

Automatic Savings:

Set up an automatic transfer from your checking account to a savings account each payday. This way, you won’t forget to save. Savings first, that way it doesn’t get spent unnecessarily. As I mentioned in another post, my wife’s cheque goes directly to the emergency/vacation fund. Unplanned expenses come from this fund.

Cut Unnecessary Expenses:

Review your spending and cut back on non-essential items. That daily coffee from the café? Try making it at home and saving the difference. Bring your lunch to work. You don’t need to live an austere lifestyle and suck all of the joy out of your life, but do spend sensibly.

Boost Your Income:

Consider taking on a side job or selling unused items around your home to add to your emergency fund. You don’t want to miss out on the joys in life because you are always working, but a modest number of extra hours can pay off handsomely.

Paying Off Small Debts

Small debts can add up quickly and become a burden. Paying them off not only reduces stress but also frees up money for other goals. Here’s how to tackle them:

List Your Debts:

Write down all your debts, from credit cards to small loans. Note the amount owed, interest rate, and minimum payment.

Here’s a free worksheet to help you with the task of listing your debts.

Prioritize:

Focus on paying off the debt with the highest interest rate first. This will save you the most money in the long run. For some, paying off the smallest debt first builds momentum.

For more detail on paying off debt, read Strategies for Paying Off Debt Efficiently

Pay More Than the Minimum:

Whenever possible, pay more than the minimum amount due. This helps reduce the principal balance faster and saves on interest. Credit card interest is probably the most expensive way to “borrow” money.

Consolidate Debts:

If you have multiple small debts, consider consolidating them into one loan with a lower interest rate. This makes it easier to manage payments, but it also can make it easier to acquire new debt. So please do be careful.

Avoid New Debt:

Don't BorrowWhile paying off existing debts, avoid taking on new ones. Use cash or a debit card for purchases instead of credit. You can ration your daily spending by carrying only the amount of cash you allow yourself for the day.

Medium-term Goals

Medium-term goals take a bit more time and planning, usually between one to five years. These goals require patience and persistence. Let’s explore two important medium-term goals: saving for a down payment on a house and investing in education or career advancement.

Saving for a Down Payment on a House

Owning a home is a significant milestone and requires careful planning. Here’s how to save for a down payment:

Determine Your Budget:

Figure out how much house you can afford. A good rule of thumb is to keep your mortgage payment at or below 30% of your net monthly income.

Make sure that you have room in your budget to cover an interest rate increase. You can never know when this will happen. Also consider what you could afford if you only had a single income for an extended period.

Set a Savings Goal:

Most lenders require a down payment of 20% of the home’s purchase price. For a $200,000 home, you’ll need $40,000. Don’t forget that you will also need legal and moving expenses which can be costly.

Open a Dedicated Savings Account:

Keep your down payment savings separate from your other funds. This helps you track your progress and helps you to avoid spending it. In Canada you can contribute to a First Home Savings Account.

Make a Savings Plan:

Calculate how much you need to save each month to reach your goal within your desired time-frame. If you want to buy a house in five years, you’ll need to save $667 a month to reach $40,000.

Cut Back and Save:

Look for ways to reduce your expenses and increase your savings. This might mean dining out less, cancelling unused subscriptions, or finding a more affordable place to live while you save. Keep in mind the reason you are buying a house. Is it worth sacrificing for a house?

Earn Extra Income:

Consider part-time work or freelance gigs to boost your savings. Every extra dollar brings you closer to your down payment. Just keep the work-life balance in mind.

Investing in Education or Career Advancement

Improving your education or advancing your career can significantly increase your earning potential. Here’s how to invest in your future:

Identify Your Goals:

Determine what you want to achieve. Do you need a degree, certification, or specific training to reach your career goals?

Research Costs:

Look into the cost of tuition, books, and other fees. Will you be able to fit in the hours needed, or will you need to factor in potential lost income if you need to reduce your work hours to study. What impact will this have on your family life?

Find Funding:

Explore scholarships, grants, and employer tuition assistance programs. These can significantly reduce your out-of-pocket costs.

Create a Savings Plan:

Similar to saving for a house, calculate how much you need to save each month to cover your education expenses. Don’t forget to factor in the cost of any extra help or services you might need while you are studying.

Budget Your Time and Money:

Balance your work, study, and personal life. Create a schedule that allows you to manage your responsibilities without burning out. There is not much sense in working like a dog to earn more to give your family a better life, only to learn that you have lost them in the process.

Leverage Free Resources:

Take advantage of free or low-cost resources like online courses, libraries, and professional organizations. Maybe what you really need is a mentor.

Long-term Goals

Long-term goals are your big dreams that take more than five years to achieve. These include retirement planning and making major investments like purchasing a second property or starting a business. Achieving these goals requires consistent effort and long-term vision.

Retirement Planning

Planning for retirement ensures you can enjoy your later years without financial stress. Here’s how to prepare:

Estimate Your Retirement Needs:

Consider how much money you’ll need to live comfortably in retirement. A common rule of thumb is to aim for 70-80% of your pre-retirement income. Invested wisely, you can safely draw 3% to 4% of your savings at retirement.

There are a number of retirement savings calculators for Canadians. A web search will bring up the most common ones. It’s far better to save too much and realize that you can live better than you planned, than discovering you’ve doomed yourself to poverty in your retirement.

Start Early

The earlier you start saving, the more time your money has to grow. Compound interest works in your favour over long periods. A dollar saved at 20 is worth more than two dollars saved at 30, and four dollars saved at 40!

Contribute to Retirement Accounts:

Maximize contributions to retirement accounts like employer plans, RRSPs or TFSAs. Take advantage of employer matching contributions if available.

Diversify Investments:

Spread your investments across different asset classes (stocks, bonds, real estate) to reduce risk. Mutual funds provide a way to own many assets over different classes, but the diversity comes at a high cost. David prefers Exchange Traded Index Funds of funds.

Monitor and Adjust:

Regularly review your retirement plan and adjust your savings and investments as needed. Life changes and market conditions can impact your strategy.

Plan for Healthcare:

medicalConsider the cost of healthcare in retirement. Look into long-term care insurance, out-of-province travel insurance and other options to cover medical expenses.

Major Investments

Major investments can provide additional income and financial security. Here’s how to approach them:

Set Clear Goals:

Determine what you want to achieve with your investment. Are you looking for rental income, capital appreciation, or to start a business?

Research Thoroughly:

Understand the market and the risks involved. Whether it’s real estate or a business venture, knowledge is key to making informed decisions. Regardless of what you may have heard to the contrary, day trading is gambling, not investing!

Create a Financial Plan:

Outline the costs, potential returns, and funding sources for your investment. This includes savings, loans, and any other financing options.

Why David invests only in ETFs.

Build a Team:

Surround yourself with experts who can provide advice and support. This might include financial advisors, real estate agents, or business mentors. This does not include your buddy’s brother-in-law’s friend who has a hot tip on the next big thing!

Be Patient:

Major investments take time to yield returns. Stay committed to your plan and be prepared for ups and downs along the way. Don’t try to time the markets.

Review and Adapt:

Regularly assess your investment’s performance and make adjustments as needed. The market and your personal circumstances may change, requiring you to pivot your strategy.

Conclusion

Setting financial goals is a powerful step toward achieving a secure and prosperous future. By breaking your goals into short-term, medium-term, and long-term categories, you can create a clear, actionable plan. Remember, small changes can lead to big impacts over time.

Start with building an emergency fund and paying off small debts. Then once that habit is established, focus on medium-term goals like saving for a down payment on a house or investing in education. Finally, plan for long-term dreams like retirement and major investments.

Don’t try to start doing them all at once, or your chance of success will shrink quickly. Start with short term goals and when they are firmly established, you can move on to medium term goals. Once your short and medium term goals are established, then you can start thinking about your long-term goals. You don’t need to achieve everything in one day, one month, or even one year!

Stay patient, be persistent, and celebrate your progress along the way. Your financial journey is unique, and with thoughtful planning and dedication, you can reach your goals and enjoy the rewards of sensible living.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

Please share your thoughts in the comment section below.

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