How to Set Financial Goals - And Stick to Them

How do you set financial goals and make sure you actually stick to them? Here are five easy steps 

Sara Silano 14 January, 2021 | 8:59AM
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Research shows that individuals are intrinsically motivated by goals and will work hard to achieve them. And people are much more likely to accomplish concrete goals, than vague or abstract ones.

Goal-setting is how individuals make everyday work and life decisions, but setting saving goals is challenging for several reasons.

Firstly, you have likely got a number of savings goals you want to work towards, not just one. Shorter-term goals might be buying a car or paying for a holiday, while over the long-term you may be saving for retirement or towards buying your home. Balancing these goals is difficult.

Secondly, not every financial goal you might seek to achieve carries a clearly marked price tag. The cost of a house in a small town may be very different from the one in the city. Retirement costs can vary even more dramatically, depending not just on planned in-retirement lifestyle considerations but crucially on your life span.

So how do we set financial goals? Here are five key-steps for goal planning:

Step 1: Write Them Down

The first step in the process is to document your goals and group them by time horizon:  short-term goals (achieve in five or fewer years), medium-term goals (five to 15 years from now), and long-term goals (15 years or more in the future).

As you go through the process, try to be as specific as possible - for example, if you have two children that you'd like to help put through university, make two separate entries. And don't forget about debt you need to pay down, whether a mortgage or credit, it should be on your list of financial priorities.

Step 2: Quantify Your Goals

The next step is to estimate the cost of each of your goals. For short- and even some medium-term goals, this should be straightforward, but estimating the cost of multi-year, long-term goals like retirement is trickier. The big wild card here is inflation: while it's currently low by historical standards, it's reasonable to assume at least a 2% to 3% inflation rate for longer-term goals.

Step 3: Set SMART goals

You might have heard the term in management meeting but it also applies to your financies. Smart goals are those which are Specific, Measurable, Adaptable, Realistic and Time-bound (SMART). 
- Specific: well defined, clear, and unambiguous.
- Measurable: with specific criteria that measure your progress toward the accomplishment of the goal.
- Adaptable: adjustable (if needed) in your regularly portfolio’s review.
- Realistic: within reach, realistic, and relevant to your purpose.
- Time-bound: with a clearly defined timeline, including a starting date and a target date.

Step 4: Prioritise Your goals

Prioritise your goals by numbering them. This is partly down to personal priorities but should also take into account what makes sense from a financial perspective and what will deliver the highest return on your investment.

The following hierarchy will make sense in many different situations:
-Debt paydown/emergency fund
-Retirement savings
-University savings
-Other short- and intermediate-term goals (within reason)

Step 5: Review Your Portfolio

With regular portfolio reviews, you can be sure that your portfolio is on track to accomplish your goals, rebalance it if necessary (based on the change in risk profile and time to goal) and weed out the underperforming investments.

What if You Don’t Have a To-do List?

Starting a to-do list can often be the most difficult part of the process and it's easy to get distracted and procrastinate. Christine Benz, director of personal finance at Morningstar, says: “Managing your finances without first articulating your near- and long-term goals means you'll no doubt find plenty of ways to spend your money, but you won't necessarily get to where you really wanted to go.

"By quantifying each of your financial goals, you may see that it's not going to be possible to achieve them all, but it's better to know that early on so you can prioritise. And each of those goals likely carries its own time horizon, which in turn will dictate what types of investments you hold and where. Once you've set your baseline goals and quantified how much they'll cost, checking your progress toward them can serve as the ultimate financial checkup; monitoring specific investments is secondary”.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Sara Silano

Sara Silano  is Editorial Manager for Morningstar Italy

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