How to Set Realistic Financial Goals

Chris Kissell
January 31, 2018
how to set realistic financial goals

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We all know the wonderful feeling of seeing a fabulous home — or a gleaming new car — that sets our heart fluttering with desire. However, the dream of owning such goods cannot become reality without creating big financial goals – and achieving them.

That’s easier said than done in a nation where millions of Americans fail to save, and are drowning in debt.

Still, there’s no reason to give up hope.

“Think of setting goals like building blocks kids play with — one block at a time. Build a good base and you can stack blocks high,” says Preston D. Cherry, a CFP professional and Ph.D student.

Following these five steps can significantly increase your odds of achieving your financial goals:

1. Decide what you want

Making choices is a big part of life. A dream home, fancy car and once-in-a-lifetime vacation all sound great. But you probably can’t afford each one, at least not simultaneously.

So, figure out which financial goals you want most. Start by writing all your goals down on paper, says Charlotte A. Dougherty, a certified financial planner and owner of Dougherty & Associates, a wealth advisory firm in Cincinnati, Ohio.

“Think of it as brainstorming,” she says. “Just think and write.”

Once you’ve listed several of your most coveted goals, Dougherty says you should “apply the funnel.”

“Begin to think about which you believe to be the most important,” she says. “Try to isolate three.”

After you – or you and a partner – have narrowed the list down to a trio, sleep on it for a night. “Then, come back to your work and see if the top three still resonate and ring true,” Dougherty says.

If the goals remain worth pursuing, consider whether each is a short-term, medium-term or long-term objective. Prioritize the goals, and create plans for achieving them. Then, get to work.

“Breaking things down into smaller pieces helps to make the exercise less overwhelming,” Dougherty says. This process also helps you focus tightly on your target goals, she says.

2. Make sure the goal is realistic

It makes no sense to aim at a target you are unlikely to hit. “If you aim too high with an unrealistic goal, the probability of failure rises,” Dougherty says.

Setting a goal to sock away $10,000 in one year may not be a reasonable if your income is only $20,000, and your living expenses suck up three-quarters of that amount.

So, adjust your sails and put yourself on course for something more pragmatic.

“Trying to save 10% of your income, on the other hand, could be a realistic goal — if you put the proper systems in place to make it happen,” Dougherty says.

In order to do that, you may want to set some “small win” goals.

“Setting ‘small win’ goals within your annual and long-term financial goals will help you with confidence and commitment,” says Cherry.

These are goals that you can achieve in three months or less, says Cherry. For example, paying off your lowest balance credit card or directly transferring a specific amount to an emergency fund account.

3. Automate your savings

Once you’ve settled on a goal or two, create a budget so you can find ways to fund your objective.

Paying yourself first – before you spend on anything else – is a tried-and-true way of reaching financial goals. This works well when you have an employer retirement plan such as a 401(k) plan.

“Your contribution comes right out of your paycheck and moves into the plan before it hits your spending account,” Dougherty says.

You can also set up your direct deposit bank account to automate a “draw” from a spending account directly into a designated savings account each month. Dougherty likes this approach for short-term savings goals, such as:

  • Purchasing new furniture
  • Funding home repairs or upgrades
  • Saving for a vacation

For intermediate term financial goals — such as saving for a down payment on a house, or financing a wedding — set up automatic transfers from the spending account into an intermediate-investments account, such as a balanced mutual fund with a weighting to fixed income.

Cherry also recommends writing down your “state of well-being,” a list that describes how you felt before starting your financial journey. This can reaffirm and refuel your commitment to your savings plan. He recommends placing it in common areas, like on your refrigerator, home computer, smartphone and nightstand.

4. Steer clear of debt

A financial goal is like a tiny seed that you hope will eventually grow into a mighty oak.

Debt is like a poisonous weed that can choke off that seed before it ever emerges from the ground.

Avoiding debt — especially credit card debt — is crucial to achieving your goals. Dougherty encourages you to take a close look at your spending patterns.

“Where is the money going?” she asks. “Too much dining out? Vacations that went over budget?”

You don’t have to eliminate spending on such activities, but try to rein in in.

“Set limits that are realistic for dining out and vacation spending so that you stay within a budget,” she says. “That allows you to have free cash flow for saving.”

5. Pick yourself up when you stumble

Inevitably, you will stumble a few times on the road to your goal. That’s a natural part of the process.

“Don’t be discouraged by a little bit of backsliding,” Dougherty says. “Get back on track.”

Just as with any challenging endeavor — from learning the piano to mastering a new sport — it takes time to become an expert saver. If you start spending too much, refresh your financial goals list and keep it in front of you. Or, take your new raise and use it to boost your 401(k) contributions.

Even just a little success can get you back on course.

“The discipline and effort put forth toward achieving a goal is rewarding, and measuring progress toward the goal is reinforcing,” Dougherty says. “Success helps us continue the good behavior that is leading us to the achievement of the goal.”

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