When it comes to money management, it seems like there are dozens of different objectives. Saving for retirement, college, a house, a car, a vacation — and maybe even enjoying life once in a while.
All of these things are important. But where should you start? How do you identify the most efficient path? And most importantly, what’s actually going to bring you happiness?
This guide on how to set financial goals was designed to help you answer these and other key financial planning questions.
Let’s get started!
We turned this step-by-step guide into a free workbook, which you can get by entering your email address below.
Step #1: Get Accurate Data
One of The Ways To Wealth’s core principles is to think of your personal finances as a business. This allows you to get an accurate, objective view of your financial past, present and future.
So Step #1 is all about taking a clear, honest look at your current financial situation.
The quickest way to do this is to create a net worth statement that lays out:
- Your assets (what you own).
- Your liabilities (what you owe).
For now, the goal is simply to list both your assets and liabilities.
Action: Complete this net worth statement.
Tips and recommended resources:
- This step is about where you are today, not any mistakes of the past. So there’s no need to judge yourself or criticize past decisions.
- Omit items like furniture, personal jewelry, collectibles, household goods and clothing from your net worth, unless they have significant value and you’re willing to sell them.
- There are many quality financial tracking apps that can help you get this information, as well as automatically update it.
Step #2: Understand your Financial Needs
When it comes to financial goals, you can do just about anything. But you can’t do everything. A solid relationship with money means focusing on the goals that provide you the most benefit.
A good beginner’s framework for setting financial goals is the first three steps of Dave Ramsey’s Baby Steps.
These steps are:
- Build a $1,000 emergency fund.
- Pay off all debt besides your home.
- Save 3-6 months of expenses.
It’s a simple framework that helps you identify how to manage your money. Once you have a $1,000 emergency fund, you then pay off your debt (besides your house). Once that non-mortgage debt is paid off, you save for a 3-6 month emergency fund.
The idea is that you’re only focused on one goal at a time.
Keep in mind that it’s easy to poke holes in Ramsey’s baby steps.
For example, is it really best for you to pay off all debt, even a low-interest student loan, instead of focusing on just high-interest debt?
If you’re not sure if this path is right for you, check out our post on the Baby Steps framework, which goes into the pros and cons in more detail.
If you’re beyond saving for an emergency fund and wondering what to focus on next, we found the financial planning software Savology to offer solid customized advice. The cost starts at just $10 per month. Read our Savology review to learn more.
Step #3: Think Outside the Spreadsheet
Ramit Sethi, author of the bestselling book I Will Teach You To Be Rich, often uses the phrase “live outside the spreadsheet.”
In other words, he’s saying that while spreadsheets should be used as a guidepost they shouldn’t dictate everything in your life and aren’t something to obsess over.
It’s for this reason that I don’t love the term “financial goal-setting.” While it’s important to identify basic financial needs, as we did above, when the term financial is added in front of goals, it tends to get people thinking of only what looks best on a spreadsheet.
The better approach is to set overall life goals first, then reverse engineer what changes you’d have to make within your finances to achieve those goals.
In the financial planning profession, there is a movement toward this type of thinking called life planning.
Developed by George Kinder, life planning is summarized as:
“Life planning focuses on the human side of financial planning. In life planning, we discover a client’s deepest and most profound goals through a process of structured and non-judgmental inquiry. Then, using a mix of professional and advanced relationship skills, we inspire clients to pursue their aspirations, discuss and resolve obstacles, create a concrete financial plan, and provide ongoing guidance as clients accomplish their objectives.”
The foundation of life planning is centered around answering three important questions.
Life Planning Question #1
Imagine you’re financially secure and have enough money to take care of your needs, both now and in the future. How would you live your life? Would you change anything? Let yourself go. Don’t hold back on your dreams. Describe a life that is complete and richly yours.
Life Planning Question #2
Now imagine that you visit your doctor, who tells you that you have only 5-10 years to live. You won’t ever feel sick, but you will have no notice of the moment of your death. What will you do in the time you have remaining? Will you change your life, and if so, how will you do it? (Note that this question does not assume unlimited funds, so answer based on your current level of earnings.)
Life Planning Question #3
Finally, imagine that your doctor shocks you with the news that you only have 24 hours to live. Notice what feelings arise as you confront your very real mortality. Ask yourself what you missed. Who did you not get to be? What did you not get to do?
Your answers to these questions can help you identify what a actually matters to you. From there, you can start thinking about how to use money as a tool to live the life you want. That’s the opposite of how most people think of money, seeing it as the goal in and of itself.
Step #4: Set Financial Goals For The Life You Actually Want
If you took the time to answer the questions above (in Step #3), what you should have noticed is that the questions get progressively harder. It’s easy to think of what you’d do if money were no object, but it’s hard to think about what you regret not doing.
What does this have to do with financial goals? Understanding your priorities in life empowers you to make financial choices that reflect these priorities.
But, then again, your priorities need to be your own. You shouldn’t purchase a home because everyone says that’s the right thing to do. Instead, do it because it reflects your priorities (e.g., because you want to raise your family in a stable environment).
And conversely, don’t do it if you have different priorities!
Clarify Your Financial Priorities
Building a list of your priorities is an important step in creating your financial plan.
Reviewing your answers above, aim to come up with your number one priority, as well as a list of the top five.
This doesn’t have to be formal — just jot them down as in the example below:
- My number one priority is: [Your top priority].
- My top five priorities are: [Your top five priorities].
Examples of financial values may include:
- Experiences with people you love.
- Personal growth and development.
- Achievement of your potential.
- Bringing up kids in a stable household.
- Freedom and independence.
- Leaving your children and grandchildren in a better financial state.
Stuck? See our article on five ways money can make you happier.
Setting One-Year Goals
With your priorities set, now list up to five things you’d like to accomplish financially by this time next year.
Remember, these goals should connect to your priorities!
- Have an emergency fund of three months’ expenses.
- Pay off $3,000 in credit card debt.
- Save $2,000 for a dream vacation.
- Open a Roth IRA account and start funding it with $200 each month.
- Attend a professional conference.
- Create an estate plan.
Not everyone will have five goals, which is fine. Often, one overriding goal makes sense, such as paying off high-interest debt. And that one goal can take a year or more. Nonetheless, you want a goal or set of goals that can realistically be accomplished within a year’s time.
Put Your Plan In Motion
Now that you have your one-year goals, it’s time to break them down into short-term steps.
What do you need to do within the next month to get on track for achieving the goals you’ve defined? Aim to set a 30-day action plan for each of your one-year priorities.
For example, if your goal is to build an emergency fund, immediate steps could be:
- Come up with a target amount.
- Open a savings account to hold your savings.
- Set up an automatic transfer from your checking to your savings account (i.e., pay yourself first).
All this can realistically be accomplished within a day.
It’s here that cash flow planning, which is the most important aspect of creating a financial plan, becomes essential. And more specifically, knowing the difference between how much you spend and save each month.
From there, manage your money in a way that ensures it’s going towards your financial goals.
I’m a big believer in reverse budgeting, where you automatically pay your goals first. With this framework, if you have a savings goal of a three-month emergency fund, that money is being automatically withdrawn immediately after your paycheck hits into a separate banking account.
Step #5: Track Your Progress
Setting goals without monitoring your progress is a waste of time.
Financial goals are an ever-changing process. And part of this process is continually revisiting your goals, making course corrections, and setting new goals along the way.
At a bare minimum, you want to start looking at the progress you’re making towards your goals at least once every 30 days. Once things are under control, you may find that a rhythm of once a quarter or once a year is sufficient.
Some of the goals you’ve set, such as paying off a credit card, might be accomplished in a short time. Others, such as saving for retirement, could take years.
Long-term goals are important, but so is enjoying today. Once you complete this process a few times, you’ll learn how to find the right balance.
To make sure you’re on the right track, I suggest tracking some basic financial ratios. Then, you should write down a few thoughts about what you were able to accomplish over the last month.
Final Thoughts on Financial Goal Setting
Too often, people approach personal finance like Monopoly — as if the goal is to simply build up the greatest amount of assets possible.
But that’s not how the game of personal finance is won.
One of the oft-repeated phrases you’ll find on the site is to make personal finance personal. In other words, you should manage your money according to your goals and your values — not mine or anyone else’s.
To do that, you start by identifying exactly what your priorities are. And then you work your way backward to set financial goals.
So whether it’s getting out of debt, building an emergency fund, saving for retirement or anything else, try not to view the task as just another one to trudge through and get out of the way. Instead, think about how to weave them into your broader life goals.
Money is a means, not an end. The key is to leverage it the right way so that you can live the life you want.