Setting Financial Goals for the New Year
It’s the start of a new year, and that means many of us are thinking about setting goals for the year ahead. Of course, it’s natural to focus on traditional resolutions, like breaking bad habits, starting a fitness routine, or finding a new job. Yet it’s also important to set financial goals, as money can help facilitate a full life.
Financial goals can include anything from paying off debt to retiring by a certain age or purchasing your dream home. Indeed, the goals you set for yourself will be unique to your financial needs and circumstances. Moreover, the best goals reflect your core values–for example, freedom, contribution, or adventure.
Regardless of your ambitions, setting financial goals is essential when it comes to financial planning. In this article, we’re sharing a three-step process that can help you set and achieve your financial goals.
Setting financial goals? Consider this three-step process:
Step #1: Review Last Year’s Financial Progress
To set realistic goals, you need to know where you’re starting from. In addition, having a baseline will help you measure your progress throughout the year.
As you’re reviewing your finances, look at your spending, savings, and earnings over the last year.
Spending
If you have a budget, how well did you stick to it? If you don’t track your spending, review last year’s bank and credit card statements. What did you spend your money on? Tracking your spending can help you develop a reasonable budget for the year ahead—and stick to it.
Savings
Next, compare your savings levels to where they were at the start of the year. How much did you contribute to your retirement, if anything? Is your emergency fund where it needs to be?
Earnings
Lastly, calculate your earnings over the last year. This may include income from your job, investments, or other sources. How do your earnings compare to your spending and savings rates? Do you have an opportunity to increase your income this year?
Note what you did well, as well as areas where you can improve. Simply being aware of your current financial circumstances will assist you in setting effective financial goals for the new year.
Step #2: Set SMART Financial Goals
When it comes to setting financial goals, it helps to know exactly what you’re working towards. The SMART goal system developed by Peter Drucker and later popularized by Robert S. Rubin can help you set clear, meaningful goals.
SMART goals consist of the following attributes:
- Specific (simple, sensible, significant)
- Measurable (meaningful, motivating)
- Achievable (agreed, attainable)
- Relevant (reasonable, realistic, results-based)
- Time-bound (timely)
Let’s say one of your goals for the new year is to save more for retirement. This is a great goal, but it doesn’t give you a clear path towards achieving it. A better goal may be to max out your retirement plan contributions in 2022. If you want to make your goal even clearer, consider defining how much you’ll contribute and at what frequency.
It’s also important that your goal be achievable. In other words, don’t aim to contribute at a rate that’s unrealistic. You’re less likely to stick to goals that are overly aggressive or create stress in other areas of your life.
Try to set about three SMART financial goals for the year ahead. Once you set your goals, prioritize them from most important to least important. Alternatively, you can rank your goals by how likely you are to achieve them. This exercise will help you develop a strategy to meet your goals.
Step #3: Develop a Plan to Achieve Your Goals
The last step in the process is to create a plan you can stick to. Oftentimes, new goals require new habits. For example, if one of your life goals is to complete your first marathon this year, you’ll likely need to develop better fitness, eating, and sleeping habits to achieve it. The same is true for your finances. Healthy habits are essential for success.
Fortunately, you don’t have to change your habits dramatically to see big results. In his book Atomic Habits, James Clear highlights that if you can improve your habits by 1% each day for one year, you’ll end up thirty-seven times better by the end of the year. In other words, aim for small, consistent changes that you can stick to throughout the year to reach your financial goals.
One of the simplest strategies you can use to create better habits is to automate what you can. For example, set up automatic bill-pay, automate your retirement plan contributions, or set up automatic transfers from your checking account to your savings account. The fewer decisions you have to make throughout the year, the better.
A Trusted Financial Advisor Can Help You Achieve Your Financial Goals
Lastly, as you’re setting financial goals for the new year, consider working with a trusted financial advisor. A financial advisor can help you evaluate all areas of your financial life and develop a comprehensive plan to help you reach your objectives.
If you’re inspired to take your finances to the next level this year, please get in touch. We’d be happy to help.
