Personal financial goals help you understand what you want to achieve and how to get there. By setting financial goals, you’ll have a sense of purpose and direction, allowing you to focus and spend your money with greater discernment.
According to the European Parliament’s Eurobarometer, around 7 in 10 people set long-term financial goals that they strive to achieve.
Setting financial goals involves turning your aspirations into tangible, measurable goals. These can be long-term goalshow to save for a down payment on a house, or in the short termlike having enough money for a vacation.
Whatever your ambitions, they allow you to make the best decisions for your future. In this article we explore the following topics:
- Define your financial goals
- The SMART approach to setting financial goals
- How to save to achieve your short and long term financial goals?
If you want to learn more about what financial goals are and why they are important, read our article: Financial goals: what they are and how to define them
Define your financial goals
There is no one-size-fits-all strategy for creating personal financial goals that applies to everyone. Goals must be individual and aligned with your valuesas well as with their ambitions and obligations.
Let’s see what you should take into consideration when setting financial goals.
1. Determine your current financial situation
Knowing how you spend your money now will help you make better decisions for the future.
First, make a list of your sources of income. The main one will be your salary, but it can include other sources, such as renting a room on Airbnb.
Then you must add up essential expensessuch as house rent, food and expenses for essential services (electricity, water, gas, etc.) and non-essential expenses (TV, services streamingmeals out, cinema, etc.).
Al subtract essential monthly expenses from your incomefind out how much money you have left each month for non-essential expenses or to save.
Review your non-essential expenses. You might be surprised by how much money you spend on things you don’t need.
2. Analyze your immediate financial obligations
What are your immediate financial obligations? These may include: debts you need to pay; a possible adjustment in the interest rate on the real estate loan expected soon; whether or not you need to save for an emergency fund that will give you financial security if something unexpected happens, like losing your job.
These obligations are those that must be present in the at the top of your priority list.
3. Reflect on what is important to you
Take some time to reflect on your core values. They are the ones who will give you the “why” behind your goals. For example, wanting to work less time to spend more time with family.
Also think about your dreams beyond obligations. Do you dream of going to live abroad, work for yourself or take a gap year?
The SMART approach to setting financial goals
SMART is the English acronym for «Sspecific (specific), Mmeasurable (measurable), Aachievable (achievable), Rrelevant (relevant) e Time-Bound (non-time bounded)».
It’s a extremely useful tool that you can use to improve your goalsso that they are clear and realistic.
How to make your financial goals and objectives SMART
Let’s take an example of a goal and see how to make it “SMART”.
Scope: Save with a down payment on an apartment in the Greater Porto area.
SPECIFICATIONS
Being specific and taking details into account is important because they can influence the size of your goal. For example, the amount of money and the time it takes to achieve it.
For example: An apartment T3, with garagein the Grande Porto area.
MEASURABLE (M)
A measurable goal allows you to track progress and improve the approach.
For example: Have as input 40,000 euros in 5 yearsit means I have to save 8000 euros per yeari.e. 660 euros per month or 170 euros per week.
REACHABLE (A)
Your goals and expectations must be realistic, otherwise you may quickly lose motivation. This means you have to take into account how much you are willing to sacrifice to achieve your financial goals and objectives.
What non-essential expenses can you do without problems? What are you open to changing in your life?
Using our example: To save this money, I will reduce my expenses with food for 80 euros a week and, at most, you spend 40 euros a month at meals outside the home.
RELEVANT (R)
Knowing your “why” is absolutely essential, as it provides the context and motivation to make the sacrifices necessary to achieve your personal financial goals.
Again, using our example: I want to save for the down payment on my house, Why I want to start a family.
NOT LIMITED IN TIME (T)
Your financial goals needthey have an expiry date, be it months, years or sometimes even decades. Make sure you work towards short-term and long-term goals so you always have a goal in sight.
Taking the example above, ours final SMART goal looks like this:
I intend to save a deposit of 40,000 euros over 5 years, to buy a 3-bedroom apartment with garage in the Grande Porto area, because I intend to start a family.
This means that I have to save 8000 euros per year, i.e. 660 euros per month or 170 euros per week.
To save this money I will reduce food expenses to 80 euros a week and I will spend a maximum of 40 euros a month on meals outside the home.
How to save to achieve your short and long term financial goals?
1. Use the 50-30-20 rule
Knowing how much you can comfortably save each month can be a challenge, and you’ll likely need to make some adjustments over time. This is where the 50-30-20 rule can come in handy.
This rule recommends it 50% of your money goes towards your needssuch as mortgage or rent, 30% on pleasurelike eating out and holidays, and 20% to savings.
Find out more 👉 Do you know the 50-30-20 rule for managing your monthly budget?
2. Set priorities and don’t get distracted
Prioritize your goals and focus on only two or three at a timecombining long-term and short-term goals. This will help you stay motivated and ensure you and your finances don’t get too overwhelmed.
3. Set partial goals
Divide your financial goals and objectives into sub-goalsfor example monthly or annual milestones. This will allow you to more easily track progress and hold yourself accountable, while never losing sight of the bigger picture.
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