How To Set Your Financial Goals In 7 Steps

Financial planning and defining your financial goals are arguably two of the most fundamental yet important steps in your financial journey. Personal finance is a culmination of budgeting, saving and investing decisions, and it all starts with identifying your financial goals and the best ways to achieve them. This makes setting your financial goals one of the key steps in the financial planning process.

In this post, we will look into what financial goals are, the importance of financial goals, the different types of financial goals, and how you can set your financial goals in 7 steps. By the end of this article, you will learn how to manage money in a way to achieve specific financial goals.

To begin with, let’s look at what exactly are financial goals and why they matter.

What Are Financial Goals?

Financial goals are your plans and aspirations regarding your personal finances and include how you would like to use your money and what you want to achieve out of it in different stages of your life. Financial goal setting is the act of establishing and prioritising your financial objectives, as well as developing a strategy to attain them. It helps you align your spending and savings with your values and goals. It also allows you to monitor your progress and modify your plan as your circumstances change. Financial goal setting is the first step in your personal financial planning process. In the next two sections, let’s try to understand the importance of financial goals and the need for financial planning

Importance Of Financial Goals

Setting financial goals is crucial since it can enable you to:

• Avoid living paycheck to paycheck and collecting bad debt.
• Create an emergency fund to cover unexpected expenses or income loss. 
• Put money aside for big purchases like a car, a vacation, or a wedding.
• Invest for long-term growth and retirement security.
• Obtain financial independence and the flexibility to pursue your interests.

If you do not have financial goals, you may be missing out on the benefits of financial planning and exposing yourself to the risks of financial instability. Some of the consequences of not having financial goals are:

• Living Paycheck To Paycheck: Without a budget and a savings plan, you may spend more than you earn and have no cushion for emergencies or opportunities.
• Accumulating Debt: Without a debt repayment plan, you may rely on credit cards or loans to fund your lifestyle and pay high interest rates that eat into your income.
• Being Unprepared For Emergencies: Without an emergency fund, you may face financial stress and hardship if you lose your job, get sick, or have a car breakdown.
• Having No Savings For Retirement: Without a retirement plan, you may not save enough for your golden years and have to work longer or lower your standard of living.

Benefits Of Having Financial Goals

If you have financial goals, you can enjoy the advantages of financial planning and increase your chances of achieving financial security and freedom. Some of the benefits of having financial goals are:

• Creating A Budget: With a budget, you can track your income and expenses and allocate your money to your needs and wants.
• Building An Emergency Fund: With an emergency fund, you can cover three to six months of living expenses in case of an emergency and avoid going into debt.
• Paying Off Debt: With a debt repayment plan, you can pay off your high-interest debt faster and free up more money for saving and investing.
• Saving For Major Purchases: With a savings plan, you can set aside money for big-ticket items such as a home, a college education, or a dream vacation and avoid borrowing money or dipping into your retirement savings.
• Investing For Retirement: With a retirement plan, you can determine how much you need to save and invest for your retirement goals and choose the best investment options for your risk tolerance and time horizon.

Types Of Financial Goals

Our expectations and aspirations keep evolving as we progress in our lives. There can be many different determinants of financial goals, including income, age, lifestyle, family, socioeconomic status, and even cultural circumstances. All these factors are variable and keep on changing with time. Accordingly, our financial goals also change with changing times. This is why, there are different types of financial goals that you need to identify and plan for, depending on the time frame.

The following are the three key types of financial goals:

• Short-term financial goals: These are the goals that you wish to achieve in a relatively smaller time frame, say in a year or two. For instance, if you are a working professional, you may wish to take a vacation or buy a new car in the coming year. You can set out your short-term financial goals and achieve them by strategically creating a budget and allocating funds for your specific goals. Besides, always make sure to set aside funds for emergencies in the short term. Your short-term financial goals should also include taking care of your debts or credit card bills.
• Mid-term financial goals: As the name suggests, mid-term financial goals are somewhere in between your short-term and long-term financial goals and work as a bridge between the two. Once you have created a budget and an emergency fund, it is time to think about your aspirations in the coming years, which can be anything between three and five years. Your mid-term financial goals can include paying off sizeable debts such as student loans, home loans, etc. It can include your plans to purchase a new house or to get married and start a family. Your mid-term financial goals can define and lay down the base for your long-term financial goals and will show you ways to achieve them.
• Long-term financial goals: As the name suggests, your long-term financial goals cater to your dreams and aspirations over the long run. In a way, they are determined by your interests and overall life goals. Your long-term financial goals can include plans for your retirement, including at what age you would like to retire and with how much money. Besides, this can also give you a scope to explore your interests and hobbies and pursue them without having to worry about your day-to-day expenses and your lifestyle. Planning long-term financial goals would include estimating your retirement needs and saving or investing in long-term instruments accordingly.

How To Set Your Financial Goals In 7 Steps

Setting financial goals is not as hard as it may seem. You just need to follow some simple steps in the financial planning process. Here are seven practicable steps to set effective and realistic financial goals for each stage of life:

1. Identify Your Goals and Aspirations

The first step to financial goal setting is to identify your goals and aspirations with not just your money but your life in general. This would help you identify specific goals and their timeline. Don’t worry; your aspirations will change with time, but this first step will enable you to identify them and strategise accordingly to achieve them in a timely manner. Your goals can be anything from planning to retire at a certain age to taking a vacation next month.

2. Make Your Goals SMART 

SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound. This means that your goals should be clear, quantifiable, realistic, aligned with your values, and have a deadline. This step would help you define your goals in a more practicable, time-bound manner. For example, instead of saying, “I want to save more money”, you could say, “I want to save Rupees 100,000 for a down payment on a house by the end of next year”.

3. Break Down Your Goals Into Smaller Steps

Sometimes, your goals may seem too big or overwhelming to achieve. That’s why it’s helpful to break them down into smaller steps that are easier to manage and track. For example, if your goal is to save Rupees 100,000 for a down payment on a house by the end of next year, you could break it down into monthly or weekly savings targets that fit your budget.

4. Budgeting

Once your goals are identified and defined clearly in a time-bound manner, it is time to create a budget for achieving each of them. At any given point in time, you may have different goals that you wish to achieve at different stages of your life. Accordingly, it is imperative to budget for them and set aside funds out of your earnings from each of them depending on their timelines. Budgeting for your goals would help you identify saving or investment instruments that would enable you to achieve your goals.

5. Write Down Your Goals And Review Them Regularly 

Writing down your goals can help you clarify them and commit to them. It can also help you visualise them and motivate yourself to achieve them. You should also review your goals regularly to monitor your progress and celebrate your achievements. You can use a journal, a spreadsheet, an app, or any other tool that works for you.

6. Be Flexible And Adaptable

Life is unpredictable, and things can change along the way. You may face challenges or opportunities that affect your financial situation and goals. That’s why you need to be flexible and adaptable to your goals. You should be willing to adjust your goals or plans as needed without giving up on them. You should also be open to learning from your mistakes and failures and improving your skills and knowledge.

7. Seek Support And Guidance

Setting and achieving financial goals can be challenging and stressful at times. You don’t have to do it alone. You can seek support and guidance from various sources, such as your family, friends, mentors, coaches, advisors, or online communities. They can help you stay accountable, motivated, inspired, and informed about your financial goals.

Conclusion 

Financial goal setting is an important skill that can help you achieve financial security and freedom. By setting specific, measurable, achievable, relevant, and time-bound (SMART) goals for each stage of life, you can create a roadmap for your financial future and track your progress along the way. Sign up on Grip and take a step towards achieving your financial & investment goals.

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