The article “How to set financial goals that are realistic and achievable” was originally published in MoneySense on October 25, 2022. Photo by Engin Akyurt from Pexels.
Goal setting is an important financial strategy, but the key is to set goals that are realistic, relevant and personalized.
Consumers and financial professionals sometimes place too much emphasis on the investing part of financial planning. A financial plan should include goals, targets and foresight to help ensure accountability and monitor progress.
And those goals should be specific and concrete. Buying investments that hopefully go up in value and trying to make a bunch of money are vague goals. More appropriate goals would be saving $1,000 per month in a registered retirement savings plan (RRSP), using the tax refund to pay for your annual vacation, and rebalancing your investments quarterly based on an asset allocation suited to your risk tolerance. Every investor has the general goal of making a profit, and the investments are a by-product of the goal.
Goal setting can be tricky in a financial and economic environment that is changing quickly, like the one we are living in now. This is an important part of financial planning. A financial plan cannot be fixed in place forever. It needs to be fluid and based on goals established and re-established over time.
Five rules for financial goal-setting
Stock markets rise and fall, unexpected home or car repairs inevitably arise, promotions and job losses form part of a normal career trajectory, and disability, divorce or death can cause the best laid plans to go awry. So, one of the first rules of setting goals is to be flexible.
Beyond that, here are some other basics to keep in mind:
- Set goals that are realistic. If your goals are not attainable, you may become frustrated if you continually fall short. It can be empowering to reach your goals and even more satisfying if you can surpass them. As you reach goals, you can consider raising the bar.
- Set goals that are relevant. Your goals should be personalized. Avoid comparing yourself to your family, friends and neighbours. You should also make sure your goal is not arbitrary; base it on your personal circumstances and develop your own yardstick.
- Reward yourself for achieving your goals. A reward can be as simple as a small acknowledgement to yourself. It can be a literal reward like splurging on something you really want to buy or do. Or it can be as easy as automating your savings and telling yourself that any remaining money from your paycheque is yours to spend without feeling guilty.
- Seek input from others on your goals. Talking about money can be an effective way to learn tips and tricks and also to revise your own money goals and values. However, non-professional input should be taken with a grain of salt, and even professional input may have inherent bias.
- A couple can have individual goals as well as shared ones. A couple will never agree on everything. And if they do, that is probably a relationship red flag that one or both are not being honest. Money tends to be a point of contention for couples, so it is realistic to concede that some goals and values will not be shared. Although big goals and money decisions should probably be agreed upon, couples should allow their partner to have some autonomy on spending, investing, career and other financial matters.
What constitutes a good financial goal?
A good goal is one that is realistic, relevant and personalized. Some examples include:
- Paying off non-mortgage debt within a year.
- Saving $1,000 each month.
- Researching budgeting apps and downloading one to make a budget.
- Rebalancing your investments quarterly, but avoiding doom-scrolling and looking at them frequently in between.
- Filing your tax return a month early, say, by April 1.
- Preparing a will and powers of attorney by the end of the year.
Why it’s important to set goals
Setting goals keeps us accountable and helps us measure progress. A financial plan generally encompasses a series of goals that are personal to you. Goals needs to be re-evaluated from time to time, but without them, it can be tough to stay on track. Planning your finances without goals is like going on a trip without a map. So, in the spirit of pursuing financial independence, make it a goal to start setting goals if you have not already done so.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.