Financial Literacy
Part 2: How to Set Financial Goals?

“I felt like it was time to set up my future, so I set a goal. My goal was independence.”

— Beyonce

There's a reason planners are often successful—they have a clear objective in mind, prioritize preparation, and build habits or strategies to achieve what they've set out to do.

As part of our financial literacy series, today we're discussing the importance of setting goals, their tendency to shape healthy behaviours, and how they ultimately lead to greater financial security and a sense of fulfillment.

Understanding the importance of financial goals

People obviously have different priorities in life, and while some may be saving for a home while others value travel experiences, goals typically share a common attribute—they are targets to be reached.

A clear direction

Intentionality is central here. Without a clear destination in mind, there's no way to tell when to turn, how to measure progress, or find your bearings. As such, goals impact the decisions we make on a daily basis—if you're hoping to buy a car for your commute to work, you likely wouldn't spend thousands on concert tickets.

In other words, having a specific endgame in mind can help you make sounder choices and avoid spending more than you realistically should.

Established timelines

They may vary in length, but short-, medium-, and long-term goals are tools to help you better prepare for the future and live with confidence. A good rule of thumb is to think about how each milestone snowballs into the next one. Paying off your credit card can free up space to eventually settle student loans, which both help build good credit and eliminate liabilities, allowing you to negotiate better terms for an eventual mortgage. It's easy to assume that long-term goals are more important than short-term ones, but at the end of the day, they're all building blocks playing a part in crafting your ideal future. 

Short-term financial goals

Think about what you want to accomplish within a year and pay particular attention to anything that may be standing in the way of your long-term financial security. These are considered low-risk, as you're unlikely to lose money through them. 

• Establishing a budget: tally your income and expenses to devise a savings plan and pinpoint any money slipping through the cracks. Most banking mobile apps can track your spending with ease.

• Paying down credit card debt: high interest rates will continue to eat away at your savings capability over time, limiting your future opportunities. We've covered debt reduction strategies previously, which you can read here.

• Building an emergency fund: life is full of surprises, and having three to six months' worth of expenses tucked away can help overcome challenges. Consider setting up automatic transfers to streamline the process.

Medium-term financial goals

With a functioning budget in place, credit card balances under control, and a rainy day fund you can turn to, you can start looking ahead to the next one to five years. We can classify these as medium-risk, implying that you might encounter some uncertainties.

• Saving for a car: be wary of hidden financing fees; consider a used car; or maybe lease for the time being—whatever your choice, consider the total expected costs over the vehicle's lifetime.

• Settling student loans: government loans and student lines of credit can be repaid without penalty, meaning that paying more than the minimum can result in significant interest savings over time.

• Starting a business: striking out on your own may be intimidating, but with ample planning, it can also be a ticket to financial freedom. Draft a business plan, find a mentor, or identify willing investors.

Long-term financial goals

Goals with a timeline of five or more years land in the long-term category, and while progress may seem slow, you're doing something right as long as it's consistent. These are often viewed as high-risk—home ownership is a common dream for many, but mortgages tie up a significant amount of capital, and as an investment, real estate can fluctuate in value.

• Buying a house: take all the same precautions you did when looking at options for cars—shop around, find more agreeable conditions, and above all else, stay within your means.

• Planning for retirement: capitalize on tax-advantaged accounts and build an investment portfolio to supplement your retirement income.

• Leaving a legacy: once you're taken care of, do the same for those closest to you. This can include funding their education, helping them start a business, or teaching them how to run yours.

Creating an action plan with SMART goals

SMART goals are a popular framework for setting yourself up for success: 

• Specific: The clearer the objective, the easier it is to achieve.

• Measurable: Defining success can help track progress and encourage you further.

• Achievable: Unrealistic can quickly become unachievable, leading to discouragement.

• Relevant: Ask yourself why it's important and how it supports your overall happiness.

• Time-bound: Anchor your goal with a specific timeline and predetermined milestones.

Because of how thorough they are, SMART goals encourage discipline and focus—you know exactly what you want, you've designated a timeline to accomplish it by, and now you can work backwards to see what steps you'll need to take to succeed.

A pair of hypothetical examples may help, and you can decide which seems more likely to yield a better outcome.

• "I want to buy a house within five years. My budget is a $600,000 property just outside the city, and I'd prefer to put 20% down to avoid paying home loan insurance. I have $50,000 in savings, meaning I'm $70,000 short. After taxes and expenses, I take home approximately $20,000 a year. If I contribute $8,000 a year to my First Home Savings Account for the lifetime maximum of $40,000 over the next five years, I'll only need to save an additional $30,000 in my bank account over that time. I can afford it."

• "I want to buy a house."

It's a generic example with round numbers and few caveats, and of course, a financial planner would take a much more detailed look at your circumstances to come up with a personalized path forward. For the sake of the exercise, we've created a free goal-setting worksheet to start thinking about how to set goals.

Tracking and adjusting your financial goals

The best financial plan is one that is ready to adapt to evolving circumstances, and an annual review can help gauge if any modifications are needed. Are you getting closer to your destination? Are you falling behind? Do you have a contingency plan to get back on track? These questions highlight why having measurable goals with established milestones is so important—they contextualize your progress so you can make informed decisions about what comes next.

How can you effectively monitor your progress toward your goals?

Having a certified financial planner is ideal, but if you're not in a position to seek out professional help, you can make sure you're progressing on your own. There's no shortage of easily accessible apps that can help you monitor your savings, expenses, and overall budget.

It may come down to how you process information. For those who work best with numbers, a thorough spreadsheet can get the job done. For those more attuned to visuals, a progress bar—like those seen at fundraisers trying to reach a certain amount of donations—might be a better solution.

What signs indicate that you may need to make adjustments?

Once you start to track your progress, you'll be able to identify potential issues holding you back. If, for example, you planned to buy a used car two years from now for $12,000 from the dealership, you'd need to save $500 per month over that time. There are three common reasons to adjust your plans.

• Pressure: if an unexpected and non-negotiable expense came up, such as a home repair or medical treatment, you may have to forego your savings target of $500 per month to take care of more pressing matters.

• Opportunity: positive surprises, such as a job promotion or a sudden windfall of cash, can also arise, allowing you to increase your monthly savings and expedite reaching your goal of $12,000 for a car.

• Relevance: if your company has recently made the decision to allow your department to work from home, a car may not be a necessity given that the commute from your bedroom to your home office is pretty short.

It's probably a good idea to reassess your priorities and where your finances should go next if you're missing, exceeding, or outright changing targets.

Overcoming challenges in goal setting

In many ways, the hardest part is setting your sights on something in the first place. Life is big, there's a lot of it to be lived, and no matter how cliché it is, you really can do anything you set your mind to—for many, this is the daunting part.

Though difficult, sitting down and reflecting on what matters most is worthwhile. Setting goals that inspire you can make all the difference by giving you the confidence, direction, and motivation to build the future you're most excited for.

There may even be some feelings of self-doubt, or a fear of failure, that arise when young professionals think about major aspirations, such as home ownership. If a mortgage is around $750,000, breaking it down into how much you'd need to save monthly, budget for ongoing payments, and build an emergency fund for repairs or other costs can be intimidating. It may seem less work to simply hope that one day you'll have saved enough money and, suddenly, the perfect house hits the market at just the right time—but that kind of wishful thinking or planning avoidance doesn't do much good. There's a lot that's often beyond our control, but setting goals and directing our efforts towards reaching them is something we exclusively can dictate.

For those in long-term relationships, transparency and communication are absolutely vital. If you fail to discuss your values and envision yourselves, your relationship, and potentially your growing family in five years, it's likely that you're not functioning as a cohesive team. Even worse, it's possible that you're heading in different directions, with one focusing on saving for childrearing and the other on building a travel fund. Speak often, listen earnestly, and respond honestly. 

Set and achieve your financial goals

Just like any other endeavour you undertake, linking your financial goals to a specific motivation or priority can boost their significance for you and make you feel more connected to outcomes down the line. As you set or review your objectives, pause to consider the underlying reason that makes them meaningful to you. What's driving this desire? Who is likely to benefit if you achieve it? What aspect of your life will it change?

Whether you're hoping to retire early, achieve financial independence, set aside money for a down payment, or just looking for opportunities to help you save money, remember that success starts with the determination to keep moving forward.