Thought about sorting out your personal finances but need a place to start? Understanding your financial goals is a good place to start, so take a read to find out more.
What has 2020 taught us about our finances?
2020 has been a year to stop everyone in their tracks. It’s made a lot of people rethink their lives and the importance of preparing for unplanned circumstances.
Thinking about the future can be very daunting. There are so many things to consider that it can put people off making plans for themselves. You can also think of this as decision paralysis. This occurs when there is difficulty choosing between a range of options. Sometimes the choice and the impact these choices have on our lives can be overwhelming and no action is taken at all. This is often the case when it comes to sitting down and sorting out your personal finances.
Are you someone who wants to start making changes through your money but don’t know where to start? If the answer’s yes, then keep reading. We’ll be providing some steps to kickstart setting your own financial goals.
Where can you start?
In the rest of the article we’ll be covering 3 key areas:
- Defining your goals and setting timelines
- The importance of starting early
- How to stay accountable
To understand what your financial future could look like, it’s helpful to set some goals. What’s really important to note is that everyone has their own journey in life. What you might consider a goal will be irrelevant to others. So looking to someone else to define your goals is not as effective for you.
How to define your financial goals
One of the easiest ways to set out a goal is by using a framework. This allows you to break down a goal and consider what’s important about it and why you’ve chosen it.
There are different methods to use, one of the most common being the SMART method.
- S – Specific – The more specific a goal is, the more effective it is to plan for
- M – Measurable – How will you know if you are making progress towards this goal?
- A – Achievable – Can you achieve this goal within the timeframe set?
- R – Relevance – This should align with your values and longer-term objectives
- T – Time – Set a realistic end date
We can simplify this down even further into 4 steps:
- Define a specific goal you have – Think about what you want to achieve
- When do you want to achieve it by – Decide whether this is a short, medium or long term goal
- Determine its value – How much you need to achieve each goal
- What is a priority – Look at your timelines. Define what needs to be prioritised now vs later
How to define your timeline
In order to understand when you need to achieve a goal, it’s important to understand the timelines of your goals. Here are some example timelines to help you measure how to categorise your goals:
- Short-term goals: Less than 5 years
- Medium-term goals: 5-10 years
- Long-term goals: 10+ years
It is important to note that timelines are dependent on each individual, so shorter or longer goals might be more relevant to your situation.
Here’s an example set of financial goals
Let’s put this into perspective for you. We’ll take a look at 4 goals and define its importance and priority based on the framework above.
Now this is by no means a guide to what you should do. If you have similar goals, what would be the priority level for you? Let us know your thoughts on facebook.
The size of the goals do not matter. They can be things such as buying an electronic device, a 2-week vacation, to bigger goals of buying a house or getting married. But what’s important is defining goals that are specific to you, your wants and needs. There are so many things that can happen in your life so it’s really important to pick out key goals. There is no set path in life for anyone and as you know things can take a different turn when you least expect it.
How do you keep yourself accountable?
Reviewing your progress on a weekly basis can help ensure you are on track. Carve out 15 minutes in your week e.g. on a Sunday morning with a cup of tea or one evening tucking up into bed.
What’s also effective is having an accountability partner. This is someone there to make sure you are on track. People are less likely to stray from a path if they are being held accountable by someone else. Pick someone you trust and know will be looking out for you. After all, you want someone to motivate you to keep going. Is there someone going through a similar journey that you can go on together?
The benefits of saving early
The sooner you start thinking about your finances, the better positioned you will be in the future. Putting money away earlier means you will need to save less as you get older to achieve the same results.
But don’t take our word for it. Let’s do a comparison of saving the same amount but starting at different points in your life to show you what we mean. We’ll take a look at two people, Ben and Alice.
Ben is 25 years old working at an agency. He wants to put some money aside each month without breaking the bank.
Alice is 45 years old with 2 children and not a lot of spare cash.
Ben and Alice both save a total amount of £48,000 before retirement. They both will retire at the age of 65 years old. We set a yearly interest rate on an investment account to 7% (excluding inflation). Now let’s look at how much they have made.
- If Ben puts away £100 per month for 40 years he could save £264,012.48 at retirement.
- If Alice puts away £200 per month for 20 years she could save £104,793.08 at retirement.
By starting earlier, Ben has saved £159,219.40 more than Alice. This is because Ben has benefited from the effects of compounding over the years.
Check out the graph below to see what we mean:
Did you know: 💡A study by the FCA showed that only 6% of UK adults in 2018 had regulated financial advice
- Set your goals as specific as possible. Think about what’s most important to YOU
- The earlier you put your money aside, the more you could save for the future
- Hold yourself accountable for your goals and targets