So how are you getting on with your New Year’s resolutions? Yes that’s right, all those promises that you made to yourself back in January about doing more exercise, eating healthier food and cutting back on spending. We are now more than half-way through the year and for many, those good intentions are long forgotten and mentally-shelved, only likely to be temporarily dragged back to the front of the mind next January, which is a shame because resolutions can be a powerful way of changing our lives for the better.
Photo by Jean-Louis Zimmermann via Flickr
The Power of Setting Goals
Effectively resolutions are goals, something that we want to achieve and by having goals in life we have something to focus our energies on. By setting realistic, but equally challenging goals and creating plans to achieve them, it is possible for us to proactively improve the way we live, whether the goal is to lose weight, move to a bigger home, go on a world-wide trip, start a family or whatever else we feel is most important.
My Goals in Life
I have a number of goals, many of which are financially related and tend to revolve around increasing my income, reducing my costs or saving up for a cool trip abroad. I also try to use the principles of SMART goal-setting.
Visit New York
For example one of my short-term goals this year is to visit New York (I live in England by the way), therefore my goal looks like this:
- Specific – Save for a trip to New York
- Measurable – I’ll need about £1,100 for flight, accommodation and spending money
- Achievable – Yes, I can afford the cost by putting aside some money each month
- Realistic – Yes, this is not a trip to the moon and back
- Timely – I want to go late November / early December of this year
The financial plan for achieving this goal is simple. From January onwards, all I have had to do is put aside £100, so that by November I will have covered all my costs. I can also stagger the expenditure, buying the tickets first by the end of July, booking the accommodation by the end of September and having my spending money ready by November.
Another short-term goal I had at the start of the year was to increase my salary by 20%. I knew that in the current economic climate my employer would not support such a significant raise, so the alternative was to look for new positions in other businesses.
In short I went through the motions of distributing an updated CV to all the major job boards and began networking with a number of recruitment agencies. After a couple of interviews I finally landed a job working for a close competitor and managed to exceed my original goal.
All this resulted from making a decision to make a change and then pro-actively putting that change into place.
Knowing Where You Are
Setting goals and determining ways to achieve them is very similar to finding your way around with a map. Your destination is your goal and your route is your plan on how to get there, but all this is useless if you don’t know your current position.
The same applies with your finances; you can’t work out a plan for getting out of debt if you don’t know how much you earn, how much you owe and how much you have in savings.
The way to understand where you currently stand financially is to create a budget, which is the financial equivalent to GPS or a signpost. Your budget will tell you:
- How much you earn each month
- How much you spend each month
- How much money you owe in debts
- How much money you own in savings and investments
Only with this information in my budget was I able to be certain that I could afford to put aside an additional £100 a month for my New York trip.
Tracking Progress Towards Your Goals
In addition to determining the viability of your goal and how best to achieve it, your budget also enables you to keep track of progress.
Every month I update my budget to record how much money I have spent and how much I have saved in my account. I don’t bother recording every expenditure, but I know what my essential costs are (such as mortgage, electricity, water, etc.) and I know how much I allow myself for non-essential spending (such as going to the pub, buying clothes, etc.). So if I am exceeding those figures I can look in more detail and understand why.
My budget was also my key tool for getting myself out of the huge debts that I had accumulated a couple of years ago. My goal was to become debt-free (apart from my mortgage) and by listing out my monthly spending and earnings I was able to reduce or remove unnecessary expenses and focus that additional money on paying off my debts.
Knowing how much I owed and how much I could re-pay each month, I was able to work out how many months it would take to pay off the debt and then keep track of my repayment progress.
Setting Financial Goals to Change Your Life
Although New Year’s is a natural time for resolutions, you don’t need to wait till next January to set your goals and the sooner you think of clear goals, the quicker you can begin achieving them.
Ideally your financial goals will be driven by what you want to do in life. So if you are hoping to buy a house, your financial goals will focus on saving up the deposit, paying off any major debts and possibly raising your income in order to afford the mortgage payments. It may take you a couple of years to achieve this goal, but at least if you know what you are aiming towards you can really focus your energies.
It also helps to categorize your goals into the long, medium and shorter-term’s:
- Long-term goals – These will likely be 20 to 40 years into the future and fairly broad. Here you need to ask yourself what you want the final years of your career and retirement lifestyle to be like and then consider a plan for funding it (such as a pension, savings, investments, buy-to-let property, etc)
- Medium-term goals – Think about the next 5 to 10 years and the types of things you will want to do, such as buy a house, get married, start a family, start a business, etc. What sort of savings and income will you require to achieve these goals?
- Short-term goals – What do you want to achieve this year and next year? These goals may include paying off your credit card debt, going on a foreign trip, buying a new car. What can you do savings-wise to ensure you don’t need to borrow money to pay for these activities?
Once you have decided on your goals, start making your plans for achieving them. In some cases you may need to seek advice from experts, such as financial advisers or from further reading of books and resources on the web, but don’t let that stop you from making and implementing your plans as soon as possible, as you can always refine them later on.
Contributor’s articles are written by members of the personal finance community. Each article was reviewed Moolanomy’s editorial team before its publication.