According to multiple studies, approximately two-thirds of Americans set financial goals every New Year. From “learning to budget” to “saving more money” most of us have the goal of improving our finances in one way or another. But, if you want to be successful, you need an intentional action plan.
This blog will help you in understanding the steps to take in order to reach your money goals in 2023 and ultimately achieve Financial Freedom!
If you’re reading this, you know that reaching the goals you set this year is just the beginning. Your success this year is the start of a journey that will lead you to the ultimate goal, where money is not an issue.
Not much of a reader? This blog was originally an episode of the radmoney podcast! Even better, read the blog and listen to the episode to help you retain what you learn!
Before You Set Your Financial Goals
Before you set financial goals, there is a process you need to go through that will help increase the odds of reaching those goals. But even if you already set a few goals and are just now reading this, we still suggest taking the following steps. Then review your goals and improve them if necessary.
Review The Last Year
The first step to setting effective financial goals is reviewing your current financial picture. The reason is simple – without knowing where you stand, it will be impossible to know how to get where you want to go.
This process will put your goals into context. While also helping you identify what’s going well and what’s not. To think of it another way – it will help you see what habits are serving you, and what habits you should eliminate or have the opportunity to improve.
Celebrate Financial Goals You Reached
Because of the way we have evolved to survive, the human brain tends to focus on negative thoughts. Always looking out for threats and being aware of what makes us vulnerable. This tendency to focus on what is going wrong can be devastating to your motivation. Which is why it is so important to celebrate your wins! It’s far too easy to focus on the negatives. So start with your positives in your review.
As you review the year, reflect on what went well and write them down. Even the little things! This list of wins will help you build momentum toward your future goals. With every small success you identify, you are more likely to continue on a positive path of consistent progress.
Identify Opportunities for New Financial Goals
The entire point of setting goals is to improve, which is why it’s important to identify opportunities for growth. But watch out for the negative tendency we warned you about! It’s OK if things aren’t going as well as you would like. It’s the action you take to improve your finances and yourself, that matters.
So as you reflect, try to avoid shame cycles that keep you stuck. Tamp down that natural tendency to be self-critical and to judge yourself for past mistakes. Instead see these things as areas for opportunities and growth.
Take Personal Responsibility for Your Finances
One of the most powerful things you can do to improve your finances is to take personal responsibility for everything. The good and the bad. Yes – it’s uncomfortable, but trust us, not taking responsibility is worse.
If you do not take responsibility and choose instead to blame external factors and form a victim mentality – you will miss the mark. When people focus on things they cannot control, they blame other people or “the system” for their problems, they tend to stay exactly where they are. They give up control of their life to outside factors that will forever hold them back.
But, when you take personal responsibility you are in control.
It’s an uncomfortable reality to admit that you are the reason you’re in this mess. But taking that ownership means you can get yourself out of the mess. You get to save yourself. This doesn’t mean you have to know all the answers, but it does put you in a powerful position to change your circumstances.
Don’t Judge Your Past – Be Objective
As you review your finances and reflect on the past, you need to be as objective as possible. This means being honest with yourself, avoiding judgment of your past self, and putting your ego aside.
When reviewing your finances and being faced with a potentially harsh reality that you are not where you would like to be…your ego kicks it into hard drive.
Everyone’s ego makes it difficult to accept responsibility for our circumstances. It loves passing the buck and shucking blame on outside factors. While at the same time, it tells us that everyone deals with the same challenges and that trying to change things is difficult, even dangerous.
This is a pivotal point in your journey to self improvement. You have to learn to silence your ego and be as objective as possible. Observe your circumstances, take ownership and avoid judging yourself for mistakes you made when you knew less than you do now.
Only then will you be able to make the positive changes you want to see in your life.
Now, Think Big Picture
When you review your finances on a micro-level it can be difficult to see the big picture. Saving a small amount of money might feel like a drop in the bucket! Not being able to pay off “as much debt as you wanted to” might feel like failure. But as you look at the bigger picture it is easier to see the progress you’re making in the right direction.
While saving $100 a month might not seem like much at first, at the end of the y’
:?ear that’s $1,200! At first glance, it might seem small. But if it’s more than you were saving before, it’s progress. What matters most is that over time all of those small wins add up.
Now that you have reflected on the year ahead and identified opportunities for improvement. It’s time to set your Financial Goals.
How to Set Financial Goals
Finally, after honestly reviewing your finances in detail, it’s time to think about what you want to accomplish in the months ahead.
Had you skipped straight to this step, like most people do, you would have made a big mistake. We think of it like being lost in the woods without a GPS. If you have no idea where you are, then it’s going to be nearly impossible to figure out how to get where you want to go.
Visualizing Your Future
This is the fun part! Before you start setting goals, creating a plan and writing your to-do list – you need to let yourself dream.
You might be wondering what this has to do with money, but think about it. Almost every life goal has a financial component. Buying a car, becoming a home-owner, family planning, vacations – it all costs money! As Stephen Covey say’s in 7 Habits Of Highly Effective People, “Begin with the end in mind.”
So ask yourself – What kind of life am I trying to design? In the future how do I want to spend my time? The more detail you add the better. You will find it is much easier to build goals once you know exactly what it is that you want.
The Science Of Setting Financial Goals
When setting goals there are ways to set yourself up for success, and ways to set yourself up for failure. We are going to break down what you should and shouldn’t do when setting goals.
The “Don’ts” of Setting Financial Goals
Before we dive into what does work, let’s first see what does not work. Think of these as common mistakes you should avoid when setting financial goals.
Setting Vague Goals
Setting vague financial goals is an easy trap to fall into. When you think about improving your finances the first things that pops into your head might be “I want to be better with money” or “I want to save more”. The problem is, when your financial goals are vague, it is difficult to know when you have actually achieved your goal! Without a well defined destination, how will you know when you reached it?
Keeping with the example of “saving more money” you can see how it would be difficult to know when you achieved it. To make your financial goal more effective, you want to make it more specific. You want to clearly define what success will look like. Otherwise you will continue to chase a goal that just keeps moving, or worse, give up!
Framing Goals in the Negative
A lot of goals focus on what you can’t do versus what you can do. Focusing on the negative, and restriction, rather than the positive trade-offs..
Diet is a great example. If you’re trying to cut back on sugar, you might say to yourself, “I can’t have dessert.” But when you create a goal this way most of us tend to fixate on the thing we “cannot” have. All you think about is desert, and it’s only a matter of time before you go for the cookies. A far more effective way to frame your goal is to focus on the positive change you will make. So rather than, “I can’t have dessert,” replace that with “I’m going to eat a salad every day.” The focus shifts to what you can do instead of what you can’t.
Apply this concept to your financial goals and focus on the things you can do that are within your budget, rather than the things you cannot.
Set Financial Goals for You!
Setting goals because of what other people want for you, never works.
All of us are influenced by the people around us and the messages we take in all day through the media. Problems occur when we take advice from others at face value, without taking our own needs and interests into consideration. It is a recipe for regret and resentment, and can even damage relationships with the people we took the advice from.
So make sure you are creating and building goals that are relevant to your needs and the life you are trying to design. Don’t set goals based strictly on what people say you “should” do. Set goals you personally connect with and that you value. Only then will you see how achieving those financial goals will bring you joy or fulfillment, and that keeps you motivated!
The “Do’s” of Setting Financial Goals
Now that we’ve covered what you should not do when setting goals. We can focus on what makes a financial goal effective, and increases the likelihood of achievement!
As we’ve mentioned, some of our biggest goals in life are in a way, financial goals. For instance – home ownership is both a life event and one of the biggest financial investments you will make in your entire life.
So to design the life you want, it is important to be intentional and as detailed with your financial goals as possible. Effective goal setting cannot be vague, impersonal or inconsequential. Better still, healthy and attainable goals are rooted in your values and beliefs. All of these things together help that dream/goal come to fruition.
That is why we like to make our goals S.M.A.R.T.
What are S.M.A.R.T. Financial Goals?
S.M.A.R.T. stands for Specific, Measurable, Achievable, Relevant, and Time Bound.
Each one of these descriptors helps you drill down your goal and be successful. Setting a goal with these parameters defines what you are trying to achieve and helps you measure and track your progress.
Setting S.M.A.R.T. Goals
Let’s break down each element of a SMART Goal to help you see exactly what we mean.
This is the opposite of a vague goal. Envision your goal in high definition and be specific as possible. Without a true vision of what accomplishing each goal looks like, you won’t know when you get there, or how far you have to go.
Example: “I want to save money.” is vague; “I’m going to start taking the bus to save money on gas and parking” is specific and actionable.
Ask yourself: What will I achieve? Who will benefit from the goal? What specific things will I accomplish?
Making a goal measurable will help you know when you have reached it! You can even take it a step further and give yourself benchmarks to track your progress.
Example: “I want to save money.” is not specific or measurable; “I want to save $1,000” is both.
Ask yourself: How much? How many? How will I know when I’ve accomplished my goal?
Set goals that are based in reality and are achievable, but not too easy. Your goal should be challenging, but not extreme or impossible. If the goal feels like too much, try breaking it down into smaller, more achievable goals.
Example: “I want to save a million dollars this year!” is likely unrealistic; “I want to max out my Roth IRA contributions this year.” is specific, measurable and achievable for many Americans if they put their minds to it.
Ask yourself: Is this financial goal realistic? Do I have the tools and support I need to accomplish this?
Set goals that matter to you and are a priority in your life – not other peoples. This makes it more likely you will prioritize the time and effort it takes to achieve them.
Example: “I want to save an emergency fund because my parents tell me I should have one” – does it make sense? Yes! We agree with your parents. But you need to see the value and relevance to how the Emergency Fund will impact your life. “I want to save a 6-month Emergency Fund so that I can take care of myself and not rely on others or go into debt when an unexpected expense comes up.” is relevant for your life and you see the importance it has on your financial journey.
Ask yourself : Is this something that I really want or need? Is now the right time to do this? Why is this goal important?
Goals should have a clearly defined time frame, including a deadline. This helps ensure that steps are taken to reach the goal by the established end date.
Example: “I want to save for retirement by maxing out my Roth IRA by the end of this year.”
Ask yourself: When will I reach this goal? Is the time frame reasonable?
Every financial goal needs a little salt. You obviously need a goal to run to, but you also need something to run from. While a positive goal is good, avoiding tragedy is proven to be a more powerful motivator for most people.
It is important to know when trying to make changes in your habits, that humans are naturally far more loss averse. Meaning we are more likely to take action when there is something to be lost. So once you set your S.M.A.R.T. goals the question is – what happens if you don’t take action?
Will you fall a year behind or will things get worse? What do you have to lose if you do nothing? The point of this exercise is to find extra motivation to reach your goals.
If you’ve followed the steps in this blog you now have a clear, detailed picture of your personal finances without letting your ego get in the way. You now know exactly what you want to improve and can take ownership of your financial future!
Based on all of that you were able to set powerful financial goals that are so SMART you can start to build an action plan that will help you achieve them.
If you want more information and context about how to make these goals really work, make sure you listen to our podcast where we share all of this information and more!
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This blog was created based on an episode of the radmoney podcast on the same topic. Catch up on recent episodes of the radmoney finance podcast and make sure you never miss an episode by subscribing on Spotify – Apple or wherever you listen to podcasts!