If you’re someone who desires a financial future that is better than your current financial circumstances, you’ll have to do more than dream big to change your reality. Whether your hope is to remedy past financial mistakes, pay down debt, buy a vacation home, or build serious wealth, it’s going to take hard work and discipline, but more importantly, it’s going to require you to get clear on your intentions and be strategic about how you’re going to get where you want to go.
Back in May, I published a blog post titled The Difference Between Financial Goals and Financial Objectives. The point I wanted to make at the time was that to get to that financial future of your dreams, you need to not only set goals, but also set the objectives that will enable you to reach those goals. In other words, financial goals provide direction, while financial objectives break down the steps you need to take to move, incrementally, in the right direction.
If you’re feeling financial stress now, you not only need to create some immediate relief but you also want to set yourself up for a better and more confident future.
How to Set Financial Goals
When setting financial goals for yourself, it’s important to be as specific as possible.
What you might not realize is that uncertainty is what’s causing much of your financial stress. Lack of clarity keeps you stuck, treading water, wondering what to do and which direction to take. As you’re grappling with the unknown, your mind tends to play out the worst-case scenarios and often leaves you wondering if you’ll ever be able to get to where you want to go.
Not having specific goals — meaning, not having a clear direction — is a discouraging place to be.
The financial goals you set might be related to:
- increasing your income,
- cutting expenses,
- or achieving a higher bank savings account balance.
To make the goals specific, you’ll want to use the SMART acronym, which stands for Specific, Measurable, Attainable, Relevant, and Timed.
For example, you might set a goal to increase your household income by 50% within the next five years.
By stating “household income” rather than your salary, you have more control over the outcome. The goal to increase it could be achieved from the combination of getting raises at work, earning bonuses, boosting your skills for a higher paying job, getting a second job, starting a side business, adding more spousal income, or making investment income.
By specifying an amount, you can easily measure your progress toward the goal.
Choosing to increase your income by 50% might be aggressive but attainable, but it also might be completely unrealistic to do in five years. Depending on your stage in life and resourcefulness, it could be relevant, or it might not make sense right now.
For example, increasing your income by 50% in five years as a 24-year-old making $40,000 a year in an entry-level job is a much different goal than it is for a 38-year-old parent of toddlers making $100,000 a year in a director-level role.
In the latter example, you might be more focused on spending free time with your family than shooting for a promotion to VP or flipping houses on the weekend for an extra $50k. In the former example, you might be able to clock 15-hour days and earn an MBA in the evenings to position yourself for that first big promotion.
In other words, think through your goals carefully before you set them. There is no benefit to setting financial goals that are not right for you at the time. If you have a kid in college, their tuition might prevent you from padding your savings account over the next four years. If you have to furnish your new home, you won’t be cutting back on your overall spending over the next six months.
How to Set Financial Objectives
Once you know the direction you want to take by setting clear financial goals, then you can begin setting your financial objectives.
Your financial objectives need to be just as specific as your goals, but each objective should aim to take you one step closer to your goal.
When people want to improve their finances, one of the mistakes they make is setting objectives without goals. For example, if you think to yourself, “I need to do better – make more money, cut back on my spending, and save more,” you’re likely to make a vague list of things you can do to improve your circumstances.
For example, you might:
- pick up a side gig to make a few extra bucks,
- make your own coffee in the morning vs. stopping at Starbucks,
- add a “savings account payment” as another payment to your monthly bills.
While these might be helpful things to do, without clear direction, and without setting specific objectives that build toward specific goals, you are not likely to feel like you’re making progress toward anything significant in particular.
You’ll drop the side gig when you tire of it, find yourself ordering a latte again, and skip your savings account payment whenever it’s inconvenient.
When an objective is tied to a goal, achieving one objective will provide a sense of accomplishment that can be the motivation you need to accomplish another one. Accomplishing each objective will take you closer to your goal.
Going back to our example above, if you want to boost your income by 50% within the next five years, your first objective might be to get a new job with a 10% income boost within the next six months. You can work with a career coach, get a professional resume written, start networking on LinkedIn, and land the new role — to check off your first objective.
Your next objective might be to buy a rental property that gives you another 10% boost. You can learn about real estate investing, research your local market, work with an agent, buy a house, fix it up, and find a tenant — check.
Your third objective might be to help your spouse start a side business selling monogrammed items. You might need to invest in equipment and supplies and help spread the word. Maybe you’ll take a small loss the first year, but boost your household income another 10% by year two — check.
By accomplishing these three objectives, you’ve already made considerable progress toward your five-year financial goal. Without setting the objectives, you might be sitting at the end of the second year, looking at your second 3% raise, wondering if your financial circumstances will ever improve.
When setting financial goals and objectives, keep in mind that competing demands will come up over time. But with clear goals and objectives in place, you’ll have the opportunity to prioritize what’s most important to you at any given moment and adjust accordingly.
Your plans may change, evolve, grow, or even shrink, but you’ll have a better handle on where you are going and where you are on the journey.
So, in conclusion, focus on what you want your money to do for you and recognize that your financial goals and objectives are what will make it work. Only then will you begin to feel less stressed and more in control of your financial future.
Hiram “Chip” Hutchinson, III, is the President of Hutchison Group, Inc. (HG), a fee-based, independent financial services firm assisting clients in and around Rock Hill, South Carolina. Chip drives strategies designed to better enrich the client’s experience, resulting in a deeper client relationship and a broader understanding of client financial needs. HG has been offering personal financial guidance for more than two decades. Learn more about them at hutchisongroup.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.