In the late seventies, a group of researchers set out to test the power of goal-setting. They conducted an experiment in which Harvard MBA students were asked whether they had written down specific goals for the future and whether they had clearly outlined how to accomplish them.
Three percent of the students responded that they had written down their goals, 13 percent said they had goals that were not written down, and the remaining 84 percent hadn’t set specific goals.
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A decade later, the researchers sought out the same students. The results?
The 13 percent of the class that had set goals were out-earning those that hadn’t set goals by two-fold. And the lucky three percent who had written down specific goals were earning ten times more than the rest of the class put together.
As it turns out, these unbelievable results are exactly that. The Harvard goal study is a myth that has paraded as a bonafide psychology experiment in self-help books and blog posts. Still, the experiment’s fictitiousness need not distract from its message: setting clear goals is a powerful exercise that impacts your future.
Whatever you envision for yourself down the road—kids, travel, or retirement—will require some dough. And since hoping for financial success is like waiting to win the lottery, you need concrete steps to secure your financial future.
Here’s where your financial goals list comes in. It takes your financial wishes into account and lays out how you can achieve them, starting now.
What Are Financial Goals, Exactly?
In a nutshell, a financial goal is something you want to accomplish that requires money. Financial goals are broken down into three categories:
- Short-term goals. These are goals that you can reach within two years. For a college student, this could be saving up for a down payment on a first apartment. A short term goal could also include paying off credit card debt.
- Mid-term goals. These are goals that you can attain within two to five years. If you’re planning to have children in the relatively near future, a mid-term goal could be saving up for a house or apartment with an extra bedroom. Saving up enough to make a down payment on a car could also be a mid-term goal.
- Long-term goals. These are goals that will take more than five years to achieve. Long-term goals include paying off all debt and building up enough savings to retire.
It’s important to set financial goals in each of the three categories so that you can cater to your financial needs at different timeframes without sacrificing one important need for another.
How to Set Your Financial Goals
Grab paper and a pen—you can start right now.
1. Write Down Priorities
To come to purposeful and measurable financial goals, start by thinking about what you want to achieve with your money. “A down payment on a new car” or “a comfortable retirement” is more meaningful than “$500 in savings” and “$100,000 in IRA savings by age 50.”
Good financial goal setting translates these visions into manageable, concrete steps. What does your ideal financial situation look like in 5 years? 10 years? Think about what your priorities are and what you hope to accomplish with your money management.
Writing out a list can help you organize your thoughts. If your finances are shared with a spouse, creating a financial goals list together will help you to stay on the same page when it comes to saving and spending.
Some important financial steps that you might consider when making your list include:
- Paying off debt
- Saving for your children’s education
- Saving for retirement
- Purchasing a big-ticket item (like a car or a house)
- Setting aside an emergency fund
- Investing your funds adequately
Specify whether goals are short-, mid-, or long-term as you brainstorm.
2. Backtrack and Prioritize
Once you’ve completed your list, it’s time to trace these goals to the present. From there, you can prioritize financial needs and establish the steps required to support them.
For each item in your short-, mid-, and long-term goals section, estimate costs or your intended savings. From there, break down how much you’ll need to devote per month to reach this financial goal. This worksheet provides a good template.
Can you commit to the monthly cost of each financial goal? Don’t be discouraged if you can’t attend to all of your goals at once. Returning to your financial priorities and revising your goals to make them as realistic as possible will increase your chances of success.
Being too aggressive with your planning can lead to more frustration and less of a chance that you follow through.
Carrie Schwab-Pomerantz, President of the Charles Schwab Foundation, explains in a recent article what makes for good versus bad debt, and how to juggle multiple financial necessities. She advocates striking a balance between debt payments and savings.
Getting out of “bad debt” is a financial priority. Saving and investing (early!) should also be prioritized, since the time value of money will grow your funds. You can see how much, approximately, with CNN’s savings calculator.
Still, the process of prioritizing is not cut and dry—you’ll need to personalize your plans depending on what’s important to you.
Planning is nothing without the action!
Make sure you set aside time to actually implement the strategies you’ve outlined to meet your goals. Better yet, do it before you stand up from your goal-setting session.
Do you need to set up an automatic transfer from your checking account your savings? Hop online or call the bank. Would you like to see a financial advisor to better direct your investments? Ask trusted friends for a recommendation. Have you decided to start a 529 Plan for your child's future college expenses? Open it up and start dedicating savings as soon as possible.
Taking action while your financial priorities are still fresh in your mind will prevent your goals from falling by the wayside. These additional strategies will help you to stay on track:
- Automate it! Automated payments are immune to human forgetfulness. It’s easy to send automatic monthly payments to various accounts so you can keep up with your goals with less effort.
- Keep your goals in view. Returning to your goals every now and then, or keeping them written down in a place where you see them often, will remind you of the payoff you’ll enjoy by sticking to your plan.
- Reassess your spending. Forgive me for stating the obvious: saving is easier when you spend less. Changing your present habits can make a big difference in your financial situation.