How To Define A Tangible, Reachable Personal Finance Goal

This week on The Simple Dollar is Goals Week. Many of the posts you’ll read are about defining personal finance goals (and other goals) that are clear and reachable, defining goals with different timeframes, and handling achieving a goal – or not achieving one. So let’s get started.

First of all, what exactly is a goal? A goal is the result toward which effort is directed; in other words, a goal is the outcome of a period of directed activity. Goals can be over any timeframe: for example, I often set very short term goals, such as finishing my grocery shopping in thirty minutes with no extra items in the cart beyond what’s on my list. I also have very long term goals, such as writing a check for my dream home at age 45 and retiring several years after that.

Goals are great because they put a carrot at the end of the stick, guiding you down a path that leads to something you truly want to accomplish. However, the truth is that we often set goals we cannot meet – and the result of that is not only the lack of reaching a goal, but the sense of failure that comes along with it. We beat ourselves up over the fact that we can’t lose that extra twenty pounds and keep it off and our sense of self-worth goes down.

Why does this failure happen? Obviously, there are as many causes for failure as there are grains of sand in the desert, but the root causes generally boil down to several groups, three of which I’d like to focus on:

A goal that isn’t clear Setting a goal of “saving money” or “losing weight” merely sets you up for failure because it isn’t clear what success actually is.

A goal that’s overly optimistic Optimistic goals are great, but setting goals like paying off your home in a year when you owe more than your annual income is probably not going to happen unless you’ve got some sort of trick up your sleeve.

A goal that’s too distant Again, distant goals are wonderful, but they require diligence. Merely setting a goal isn’t enough.

In each of these cases, you can head off potential challenges to reaching the goal by putting in extra effort when you define the goal right off the bat. Let’s work through an example to see how you can do this in your own life.

Let’s say your goal is to save money for a house; a fine goal, indeed. However, it has some problems that make it difficult for anyone to achieve.

It’s not clear and specific Whenever you define a goal, you should make sure it answers a few basic questions with as much specificity as possible: What? When? How?

What is the goal? Obviously, to save money for a house. But what kind of house? What will it cost? Where will the house be? Will it be pre-owned, or will you build your own? How much of the down payment do you plan to cover?

When is the goal? When do you want to be moving into that house? One year? Five years? Ten years?

How will you get there? Where will this money for savings come from? Right now, you’re not saving, so you have to define what exactly will change in order for you to begin saving at the rate needed to meet the specifics you’ve already set.

Using this process will transform the goal into something specific, ideally with specific savings goals each step along the way (weekly or monthly). These sub-goals are typically called milestones and can often be thought of as goals themselves: my goal for this month is to save $X, for example.

It’s too optimistic Is it within the realm of reality for you to meet the goal you set? This is more of a balancing act than anything – you want to make it so that you’re accomplishing something, but you also don’t want to make it impossible. For example, going from barely breaking even each month to saving 40% of your paycheck will be extremely difficult for much people, so set the goal lower.

It’s too distant Obviously, the best way to handle this is by setting milestones, particularly ones that at first give you a little bit of room to figure out how it’s going to go. For savings goals, I generally find that a gently graduated approach works well: saving $X the first year, then saving more the second year and so on. This way, you find success at each point along the way.

So, using these tips, you can change your goal to something much more specific and tangible: “I am saving money for a $200,000 house in Iowa. I want to move in in five years and I want to have a 10% down payment in hand, so I will need to save $20,000 in five years. That breaks down to $4,000 a year, or $333 a month. For the first year, I’ll save $300 a month, then add $20 a month each year after that. I will put this in a savings account that earns 5.05% APY interest.”

This time around, you have a goal that’s clearly defined, with specific action points for you to follow. You can now start working towards this goal immediately, instead of it being nebulous and easy to postpone and forget about.

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