The Formula For Figuring Out Your Financial Goals

It's common to feel pressure to invest your money. With inflation burning away the value of your hard earned cash more and more with every day that passes, the time has come to start taking action.

However, getting started with investing can be an intimidating prospect if you don’t know where to begin. There are so many options out there, and not knowing which option is best for you can quickly become daunting. So where should you start?

First, you need to determine How Comfortable You Are With Risk by taking our Risk Questionnaire. This will help you to understand how much volatility you can stomach, to make sure you’re not investing in something that will make you pull your hair out with stress!

Next, it's time to figure out what your financial goals are. When you have a clear idea of what your dreams and aspirations are, you can use this information to tailor your actions and make choices that will help you get closer to meeting your future objectives.

What Are Financial Goals?

Financial goals are the things you want to achieve in the future, whether that's in a few months or a few years.

It might be something material like buying your first home, saving for a car or treating yourself to a holiday. It can also be something less tangible like developing a healthy relationship with money.

Everyone has different wants and needs, so you should set goals that work for you, and that are relevant to your life stage. You'll also have short-term, mid-term and long-term goals, as well as financial objectives that benefit other people (such as children) or help build on your existing assets.

Why You Should Make Financial Goals

There’s a saying that goes, “if you fail to plan, you are planning to fail.” This couldn't be truer when it comes to your money. Having a clear picture of your financial goals is the only way you're going to get there and make sure you stay on track.

If you want to retire by 65 years old, start doing the math now on how much money you will need to save each year to be able to fund your lifestyle.

I’m not saying you should attempt to predict the future, but you can make some educated guesses about the type of life you want to live one day. Having a clear idea of where you want your money to take you will help provide direction for the decisions you make today.

Without goals, you have no idea what success looks like. Without knowing what success looks like, you tend to get distracted with instant gratification instead of focusing on creating long-term value in your life.

Just remember not to sacrifice your happiness trying to reach your goals at all costs, the true benefit comes from the process. By establishing good habits and patterns you’ll give yourself the best opportunity for success.

Make Sure The Goals Are Your Own

I’ve always been a big fan of goal-setting. I think it’s one of the most important things you can do to help yourself succeed. It’s also a great way to ensure that you’re living a life that is truly fulfilling for you.

That being said, I’ve noticed something about goal setting that I don’t love: it often leads people to try and achieve goals that aren’t really theirs. In other words, they set goals based on what they think they’re supposed to want, or what they think will make them happy.

I get it. With the infinite flow of information in the modern day, it’s become common to shape your lives based on others. However this can often lead to a lack of satisfaction or passion. In order to make sure that you’re truly on the path to happiness, it’s important to be sure your goals are your own.

Everyone's financial situation is unique. You might want to retire at age 45, or you might want to save enough money to be able to travel the world full-time. Regardless of what people around you are doing, choose goals that will add value to your life. Every person finds value in different things, so don't feel pressured to buy a house or have a big wedding if these aren't what you really want.

By exploring the reasons for your wants and needs, you'll be able to determine how much you really want them. The more important something is, the more intensely you should pursue it. If something is less important, then it shouldn’t take up as much of your time or money.

Examples of Short and Long Term Goals

You’re likely to have multiple goals in your life, which can give you a serious headache when you’re trying to create a plan. You can make your life easier by splitting them into short and long term objectives.

A short term goal is one that you need to achieve within a year or two. These are usually smaller steps on the path towards your long term goals. For example, buying a new car would be a short term goal because you know how much it will cost. But if you want to retire at 55, the sum of money you need for retirement is not something you can easily determine.

Here are some examples of Short and Long term goals:

Short Term

Creating a Budget

Regardless of how much money you make or how much debt you have, the first step to reaching your financial goals is to create a budget. By creating systems and rules for different kinds of expenses you can spend on things you really want without guilt.

Saving an Emergency Fund

Saving an emergency fund is important because it gives you peace of mind knowing that you'll always have cash on hand if something unexpected happens. It's always a good idea to have enough money in your bank account to cover your lifestyle expenses for at least 6 months in case you suddenly lose your income.

Long Term

Buying a House

Purchasing a home is an exciting milestone, and it's likely the biggest purchase you'll ever make. You'll need at least 10% cash as a deposit and enough annual income to be eligible for a mortgage to cover the rest. Don't forget to include costs like stamp duty, solicitors, mortgage fees.

Funding your Retirement

Everyone wants to stop trading their time for money eventually. There are many ways to fund your future: You can buy income-generating assets, such as rental property or dividend-paying stocks; you can save a specific amount of money each year; or you can contribute to a pension.

The Formula for Figuring Out Your Financial Goals

Here are six steps to figure out your financial goals:

1. Figure Out What Matters to You

Your personal financial goals should be based on your values and your life priorities. You may want to buy a home, send your children to private school, or retire early; you may want to have the flexibility to travel or change career paths.

Write down all of your goals. Get out a pen and paper (or use a spreadsheet) and make a list of all the things you hope to accomplish with your money.

2. Categorise Your Goals by Timeframe

There are three basic categories: short-term (within two years), medium-term (within five years), and long-term (within 10 years).

You may have several goals in each category, which is fine. But you'll want to prioritize them in terms of significance and urgency. For example, saving for a big trip to Asia in three years is probably more important than saving for having a baby in 10 years.

3. Make Sure Your Goals Are SMART

Getting clear on your goals is a key part of any financial plan. It's also essential to make sure that the goals you've set are realistic.

You can do this with SMART, which stands for Specific, Measurable, Achievable, Relevant and Timely.

Specific - State exactly what you want to achieve. For example, instead of saying "I want to save more money", say "I want to save £100 per month".

Measurable - You need to be able to track your progress in order to determine if you're on course to achieving your goals. For example, instead of saying "I want to improve my credit score", say "I want my credit score to be over 750 by December 31st".

Achievable - It's important to set goals that are realistic. If you aim too high, you'll probably give up. Setting a goal of saving £500 a month when you earn £2,000 a month is unrealistic. Maybe your monthly income will increase in the future, but right now, that goal is unattainable.

Relevant - This means looking at your big-picture financial plan and setting goals that get you where you want to go. If paying off debt is your goal, then putting more money into retirement savings this month isn't relevant — it doesn't help you reach your main objective.

Timely - A goal without a deadline is just a dream. Set mini-deadlines along the way to make sure you stay accountable and don't lose sight of the end date.

4. Create a Realistic Budget

Get a clear understanding on the money flowing in and out of your accounts. Determine your net income. This is what's left after taxes, national insurance premiums and other mandatory deductions. Decide on your spending priorities. Living expenses come first, but you might prioritise paying down debt or saving for retirement over splurging on entertainment.

Adjust accordingly to reach your goals. Pick the most important goal and tweak your budget to make it happen faster (within reason).

5. Split Up Your Savings

A good way to save money is to set up some separate bank accounts. If you're saving for a couple of different things, you can split up your savings.

If it's a short term goal then a simple bank account will do, but if it's something far in the future you could open an investment account to give your savings the opportunity to grow over time.

Make saving easy by setting up automatic transfers into the various accounts. You can even set up a standing order or direct debit if you find this easier than having to remember each month.

6. Monitor Your Progress

With a little hard work and dedication, you can definitely achieve financial success, but only if you put some effort into monitoring your progress and setting goals to work towards.

By monitoring your progress you will be able to make adjustments as you hit different milestones. Once you have your smaller steps nailed down, try taking a stab at the bigger ones.

This Is My Formula

It isn’t perfect, but that said, I believe it can be very helpful to set some financial goals and figure out what steps you need to take to achieve them and hopefully this formula will help you do just that.

It’s worth noting that your progress should not be linear, there will be strides forward, followed by some ups and downs before you make your final push towards your goals. With an end in sight and a little determination, you should have no problem reaching your goals!