Happy new year! January is usually the time when everyone sets goals for the year, so I thought I’d write a post about financial goal setting. However, since there is already a ton of information on how to set goals, I’ll touch briefly on the subject so I can focus more on how to actually achieve them.
Setting goals
Set stretch targets, but be realistic
I find that using past data helps a lot when setting stretching, but realistic financial goals. For example, if your budget says that in 2020 and 2021 you only managed to save 20% of your income then aiming to saving 50% in 2022, is likely to be an unrealistic goal. Aiming to save 25% to 30% of your income would be much more reasonable and value adding to your financial journey.
Base goals on what you can control
In my earlier years I often set goals to achieve a particular net worth by the end of the year. However, it Mrs FFE that told me this was incorrect because net worth is highly dependent on market returns, which are outside of my control. So, when it comes to short term financial goals, always base them on what you have control over. So, in this case aim to control your savings rate/amount of money saved over the year.
Break up your goals
Most people aren’t able to focus on working towards long term goals, so breaking up large goals into smaller ones is really important. For example, paying off your mortgage can be broken down into monthly payment targets to help maintain focus in the short term.
It’s not always about reducing expenses
Often, we look to decreasing spending in order to increase our savings rate, while this is a very powerful tool, especially in the short term, increasing income is also part of the equation that must not be neglected. A couple of goals that can help tremendously here are – saving 100% of your bonus or maintaining your current level of expenditure after you receive a pay rise.
Mindset
Look at tasks as opportunity
I try to look at each day as an opportunity to work towards achieving my goals and/or bettering my life. What this means is for every financial goal, focus your attention on ways that it betters multiple parts of your life, as opposed to looking at them like chores. For example, if I need to run an errand that’s close by, I’ll look to ride my bicycle instead of driving. While this helps to save money on petrol, I prefer to look it as a fun opportunity that betters my health.
Working on financial goals creates freedom
A strong financial position affords you the ultimate luxury of freedom. Not being able to control impulsive wasteful spending puts you in a position where you need to constantly trade your time to fund purchases that add limited value to your life. Daily, we are faced with choices about what to do with our time, but without a mindset that aligns with our goals choosing instant gratification generally takes precedence over working on long-term goals.
Our brains are hardwired to seek instant gratification, which is why it is so difficult to choose to exert effort towards achieving financial goals which, by nature, have pay offs in the future. One technique that I use to overcome this is to tell myself that I am buying freedom. This reframes the choice from:
Do I buy this item for instant gratification or do I save the money for no reward?
to
Do I buy this item for 5 seconds of instant gratification or do I buy the ultimate luxury of freedom that will last forever?
Remind yourself frequently
Financial goals, like any others, should be meaningful. For me, creating financial freedom is the opportunity to pursue my interests, regardless of how well they pay, and to gain control over my time. Regularly reminding yourself of why you are exerting effort towards any financial goal is important to maintaining your own motivation. There aren’t many days that go by when I don’t visualize what my financially independent life would look like.
Reward yourself
Ideally, motivation should be intrinsic, as in you perform the activity because you enjoy it. So, the act of strengthening your financial situation should provide satisfaction. However, it’s easy to understand why this isn’t the case for financial goals, so providing some extrinsic motivation can help. Such things might include, celebrating the milestone with a dinner or buying yourself an item that you’ve been wanting for a while as a reward for achieving a goal. What’s important is to size the reward appropriately, so you shouldn’t through a lavish party for you and 50 friends to celebrate paying off a $10,000 credit card debt.
Use systems and habits
I like to think of systems as things that help you achieve a goal automatically – these can be machine driven or habitual. Systems require effort to implement but limited effort to execute. An excellent example of this is setting an automated transaction to invest your money on your pay day. A system like this limits the money you have available to spend as well as automatically achieve an investment target. It’s an action which requires some effort to set up but almost no effort to continue over time.
Pace yourself
When compared to the length of a financial journey 1 year is a short time, but it is still plenty of time to lose motivation. One of the reasons for this can be sprinting too hard for the first couple of months. Using the example of trying to hit a yearly savings target, going ‘too hard’ at the start can result in cutting wasteful spending and then proceeding to cut expenses that bring real value to your life. This will only result in crushing your motivation for the remainder of the year.
What does this look like in practice?
- Look for healthier and more cost-effective ways to go about your life every day. View your life’s admin (gardening, running errands, picking up groceries, cooking etc.) as an opportunity to expend your own energy to improve your health
- Equate the cost of a purchase to your time spent working to help decide how valuable it really is to your life
- View activities that build financial security as purchasing your freedom
- Visualize your ideal life each day, this is what your financial freedom will enable
- Celebrate your efforts and wins
- Automate any tasks that are repetitive to remove hesitancy
- Make constant progress throughout the year
Engineer your freedom