This year I’m going to save 50% of my take-home income. That was my goal when I first started learning about personal finance. I figured out how much that money would be worth to me in 10 years, got really excited about that number, and set about automating money into savings.
There was just one problem – I hadn’t been realistic about how much I spend each month. For several months I beat myself up, usually starting around the 15th, seeing how much I’d overspent. So, why is it important to set realistic goals?
Don’t Beat Yourself Up
Beating yourself up because you haven’t met your financial goals is a great way to miss out on progress. Setting unattainable goals is a dangerous loop to live in. When you can’t meet your goals you end up in danger of losing motivation, or even worse, self-sabotaging.
You might think that you’re not the type to throw it all to hell just because you didn’t hit your goal, however, behavioral economics tells us that there are powerful, human, forces at play that don’t allow for the best decision-making when we’re under stress. And what’s more stressful than a sense of failure?
If you want to get your finances in order it’s important to start with realistic goal setting. As you continue to feel a sense of success you can add goals. Before you know it you’ll be well on your way to thriving financially.
Define Your Why
The first step towards realistic goal setting is to define your why. What is it that you really want? Of course, we all want to be millionaires, but why? How will your life be better?
A really great tool for defining your why is using the 7 Stages of Financial Freedom by J.D Roth from Get Rich Slowly. If you find yourself in one of the “surviving” categories, making it to “thriving” is a good place to start..
The first stage in thriving is “security”. At this stage, you have enough money invested to know that you could live an extremely humble and modest existence without needing to work another day in your life. Security becomes your why, you know your ability to eat and put a roof over your head is not dependent on an outside source re: work.
If that “why” is too far beyond the horizon for you, simply getting to the next stage from where you’re currently at is also a good place to start defining your why. Once you know where you want to be, add some color to your why. What will solvency, agency, or security do for your life?
Mine is “I no longer want to sell my time for money”. That’s financial independence and while I have a long way to go I know that when I get there I’ll have a level of freedom in my life that I have always craved. To me, that looks like going to my old home in Paraguay for a month or spending snowboarding season in Utah.
Whatever your why – don’t forget it. This is your driving force. This is what you come back to every time things get hard. Write it down and make it your mantra. I remember mine every time I want to go to a fancy dinner. It allows me to ask myself what I want more – the immediate gratification of perfectly cooked scallops or winters on the slopes. I’m not perfect, sometimes the scallops win, but not always and that’s progress.
Set SMART goals along the way
Now that you know your why it’s time to get down to business. What can you do right now to work towards your why? Before you put pen to paper on goals there are a few important things to remember.
Realistic goals start with things you can control. This means your own behavior and habits. For example, you wouldn’t want to set a goal to get a raise since that’s out of your control. You could instead set a goal to ask for a raise, realizing that the outcome may not be in your favor.
Realistic goals are also based on positive behavior, rather than negative, what you will do rather than what you won’t. For example “I will stop using my credit card” is a negative behavior, something you will stop doing. Instead “I will take out $200 in cash from the ATM every week and only spend that cash” is much more achievable in that it gives you something you will do.
As you work out your goals, the most effective way to build them is using the SMART framework. SMART is an acronym that stands for “Specific, Measurable, Attainable, Relevant, Time-bound”.
The table below gives examples going back to my “why” of becoming financially independent with the goal of saving 50% of my take-home pay.
|Specific||Is it clearly, simply, and positively stated as to exactly what you want to accomplish? (who, what, where, and why)||I will save 50% of my monthly take home to my individual brokerage account, ESPP and 401K so I can become financially independent.|
|Measurable||Is it measurable? How will you know when the goal has been achieved?||I will have achieved my goal when my monthly savings rate is equal to 50% of my after tax earnings.|
|Attainable||Is it achievable? Is it feasible? Is it realistic? Do you have the resources needed? Can you be successful?||This is attainable if I reduce spend on rent, refinance credit card debt and cook 90% of my meals at home|
|Relevant||Is it relevant to what you want to accomplish? Is it of value to you? How strongly do you want to do it? Are you committed?||This goal supports my desire to be financially independent in 10 years.|
|Time-bound||Is there a due date, deadline, target date? When do you want to achieve it by?||I can make all necessary changes to my behavior by 11/30/2021|
While I use a fairly hefty goal as my example, I could reasonable break this down into many smaller goals around the behaviors I’ll need ot change to support it. The smaller the goal and hte timeline the more realistic it is. Try starting with the smallest possible goal you can and then work up to the big ones like savings example I have above.
Strategize for Obstacles
Now that you have your first goal written down, the most important part is to take action on it. Remember at this point that you have all the potential in the world to meet your own needs, as long as the goals that you have set for yourself are realistic.
The strategies that will work for you will be unique to you. Take a minute to think of accomplishments you’ve had in the past and what helped you reach your goal. Think of ways to apply similar strategies to your new goal.
You also need to have strategies in place for foreseeable obstacles. Going back to the example of my own goal, I know that an obstacle I will have to overcome is a habit of ordering delivery. About once a week I find I hit a point where I don’t feel like cooking. The problem is that delivery ends up being quite expensive at times, once I’ve paid for the food, delivery fee and tipped the driver. So I have two strategies in my back pocket:
- Every time I cook something that can be frozen, I make extra and pop a serving into the freezer so its there for me when I don’t feel like cooking.
- If I really want to get delivery, I limit myself to promotions. Most delivery apps will have promotions for free delivery or $5 off an order. This way I try to keep total costs to $25 or below
That’s one example but there are many obstacles that can come up along the way. I am also brainstorming strategies for surprise expenses, giving up Ubers, and quitting impulse purchases.
Emphasize your Strengths
In addition to planning for obstacles, you also will want to strategize ways to emphasize the strengths that you bring to the table. Brainstorm as many strengths of yours as you can think of in 5 minutes, and then write down how you can apply those to help meet your goals.
Here are a few of mine
I love data -> I can monitor my spend on my credit card and celebrate the wins
I have an awesome and supportive network -> share my goals and strategies with friends and family so they’ll cheer me on
I‘m flexible -> I won’t need any bells and whistles in my new apartment, just something basic that allows me to work
Celebrate the small wins
The path to success will not be a straight line. However strong your will, or lock tight your strategy is, it’s likely that mishaps will happen. Don’t spend too much time overthinking those. One of my favorite quotes comes from Paul Coelho –
“The secret to success is falling down 7 times and getting up 8.”
If you stumble or fall, get back up and keep going. Ruminating, beating yourself up, or giving in to failure are great ways to make yourself miserable, or not meet your own needs. If this happens regularly, the problem may be an unrealistic goal. Try going back, now that you have more information, and see if you need to tweak or re-set.
Most importantly, celebrate the small wins. Nothing worth doing comes quickly or easily. If it was quick and easy, everyone would be exactly where they want to be financially. Clearly that’s not the case. So take a moment to celebrate every tiny step forward. If you can, find someone who is also working on their own goal and celebrate together.
A small win can be something as simple as setting up autopayments for your credit card or opening that investment account you have been thinking about for so long. Sent $20 into your savings? Well then, fuck yeah!
Why is it important to set realistic goals? Because its the first step in realizing your why.