A logical starting point for a personal financial plan, a budget, or an investing plan, is determining one’s own financial objectives. This means asking oneself – what do I aim to achieve with a given financial decision, or what am I investing for? When people hire financial advisors, one of the key pieces of information that needs to be collected is precisely that – a client’s goals. And often one’s financial goals would be intrinsically linked to one’s life goals – there is a natural interplay between the two. However, some people struggle to clearly define their own goals, not just because of lack of clarity but also because of the awareness about how dynamic they can be and how uncertain the future to which they relate can be. Nevertheless, without clearly articulating these goals and giving them specific dimensions, the likelihood of financial missteps could rise drastically, and the possibility that one is not able to build the wealth one desires increases.

The content of this post does not constitute financial advice. It is intended for educational purposes only.

where to start…

Let us first understand what we mean by “financial goals“, keeping in mind that they do not exist in some imaginary, isolated world, but are directly or indirectly related to our real lives. Hence, we can broadly define them as the outcomes or accomplishments that are intended to motivate people to achieve certain financial or life milestones, overcome certain financial or life challenges, or give meaning/purpose to one’s life. And since this definition is too broad, it is important to note that these goals can range from the more concrete (e.g., achieving €1m net worth) to the more abstract (e.g., becoming financially independent). In the advisory and planning businesses, professionals could attempt to differentiate between goals, objectives or targets, depending on which one is aimed at supporting the other or which one is more general or more specific, etc. For instance, individual objectives and specific targets could be defined within each broad financial goal, consistent with the individual steps in the process of achieving that goal. But for this discussion, the focus will be on goal setting.

Another important aspect of this goal-setting process that is key to remember, is that it is not solely about stating clearly what you are aiming for. It is also about defining the dimensions of your goals. So as you start thinking about the things mentioned earlier and asking yourself “What do I want to achieve/do?”, other questions will also need to find their answers, such as “Why do I want that”, “When do I want to achieve/do that?”, “How am I supposed to measure it?” or “How do I get there?”. Of course, the last question is about determining the actions, i.e. financial decisions that will need to be taken to achieve these goals, so the answer will depend on all your circumstances and the answers to the questions that precede it.

Why is this step so important? Say you want to generate a given regular amount of income from your investments – a cash inflow that you would like to use to cover some regular spending or another type of cash outflow (e.g., a debt repayment). This is a very simplified example in which we ignore all other circumstances. This kind of goal has a direct effect on how you decide to structure your investment portfolio. You would not have the freedom to allocate to just any type of asset – you need assets that have a certain regularity and size (set in nominal or real terms) of cash flow payouts. And in this particular scenario, for example, you would likely be better off investing in certain types of fixed-income instruments or dividend-paying equity instruments, rather than riskier zero-dividend growth stocks. Essentially, your goals will serve as a core guideline and a key limiting factor as to what financial decisions, including investment strategies, will be appropriate for you, and how you can implement them.

My suggested framework

In this section, I will lay out a simplified process that can help any individual investor, or a person who would like to plan their financial future, define their goals. Many of the conclusions one comes to after going through this process could be a consequence of one’s own ambitions and life decisions or aims, which, as mentioned earlier, is no coincidence. After all, your financial life is a function of your real life and is meant to support it, not the other way around. So when you set out to achieve something financially, that would generally lead to something you have also planned to do with that money – i.e., a trip, education, a wedding, retirement savings, starting a business, buying a house, paying off a loan, etc. And this is precisely what the first step is all about.

1. Brainstorming: life, needs, wants, ambitions
As a starting point, you (and your spouse or family) will need to ask yourself(-selves) what is your outlook for the future – where do you see yourself in a year, a decade, or more (e.g., going back to school, taking a year off work to go on a trip, having a child, etc.)? The answer to those questions could be very personal, depending on where you are right now in your life, to what extent that deviates from where you plan to be, what compromises you might need to accept due to personal circumstances, and so on. Many people’s lives are complicated by matters of different sorts, and this can have a major impact on your thought process and how ambitious you decide to be with it.

Professional financial planners usually look for several things in the goal-setting process – you can also think about those when brainstorming:
– Wants vs. needs – these can be the source of particular short- or long-term goals, hence it is important to distinguish between them. Needs are generally related to things absolutely necessary for survival and basic functioning in today’s society (water, shelter, food, clothing), while wants encompass things that we desire or strive for but are not really required for sustenance. For example, if you work from home, then your needs might include having a basic computer that allows you to do your job; however, you might want to buy the latest model computer of the most expensive brand on the market – that is no longer a need.
– Life-cycle events – at certain stages in the lives of the majority of people, particular socio-cultural, socio-economic, or biological events occur. Those include, for instance, attending university, getting married, having children, buying a home, etc. Many of those can be associated with financial needs and decisions, which makes them a great example of meaningful life situations as a basis for setting financial goals.
– Life transitions – similar to the previous category, life transitions refer to those periods when changes in our lives could, sometimes unexpectedly, create new financial needs, and hence new goals for us, or modifications of existing goals or their prioritization. Two examples would be losing one’s job (which may cause one to postpone other financial goals and dip into one’s emergency fund for a while) or chronic health conditions (with similar consequences or even, in some countries, causing one to resort to debt in order to afford medical care).

Some special circumstances that could lead to some particular types of new financial goals that might not be covered in the categories discussed here might include divorce-related planning (e.g., paying alimony), retirement account conversions, relocation to a foreign country, special tax liabilities, early retirement and financial independence, charitable planning, dependent care.

Below you will find a sample list of various types of financial goals, which can also be utilized in one’s brainstorming process.

2. Timing: assign specific horizons
Every goal should have a specific timeline attached to it. That’s because the individual is usually time-bound in their achievement, and even if that is not the case – timelines provide structure and a sense of urgency that motivates optimization of one’s limited resources, including time. Deadlines help to avoid persistent procrastination and ensure that progress is made regularly and systematically.

In terms of timing, goals can be split into 3 groups:
– short-term – these are usually goals that can be completed within 6 months (e.g., saving for a trip, paying for a specific service, creating a sinking fund, building an emergency fund, etc.);
– mid-term – these are generally accomplished in 6 months up to 3-5 years (e.g., paying off shorter-term loans, purchasing a replacement for your outdated phone, paying for a wedding, etc.);
– long-term – goals that can be achieved in over 3-5 years, and usually can take one or more decades (e.g., retirement savings, realizing certain returns from a long-term stock portfolio, planning for long-term care, etc.).

One important note is that timelines can be quite strict for some goals and more flexible for others – it depends on the type of goal and the individual circumstances and limitations that exist. The circumstances in which goals are defined and timelines set can change over time, so whenever there is flexibility, one must be aware of it and be ready to take advantage of it, if necessary.

3. Measuring: quantify the relevant measurable aspects
Financial goals are generally most useful when they are defined using specific quantifiable metrics – for instance, by assigning a monetary amount or a range to be achieved. In some cases, the quantification could relate to a level of returns or volatility of returns (both in %). And in other cases, the specific amount can depend on the particular definition and not be very specific (for instance, the goal is admission to Oxford University or Humboldt University – they do not involve the same tuition fees or cost of living). Being able to measure the goal gives one the ability to more clearly track one’s progress over time, adjust for unforeseen surprises, and keep one’s motivation strong. That also means you can keep yourself accountable when you are too far in terms of progress toward the final value.

4. Integrating: incorporate your goals into your decisions
When defining the goals, you must ensure they can be factored into your decision-making process in practice. To that end, when setting them, you could make sure each goal has a link to a specific component(s) of your financial plan or is mapped to a set of financial decisions that you intend to take. This way, you can be aware of the implications of each goal for those decisions in advance, and how they are limiting the options you have available. For example, if you aim to achieve a certain percentage growth of your portfolio over time, you could only consider asset classes that can offer that growth potential, and others might not be suitable. Another case in point is deciding between investing and debt repayment – an often-asked question. In making the decision about which one to prioritize, you will need to know what your goals are, how they rank, what each decision would cost you, and the return it would generate for you.

Practically, this could also mean that you might need to break down goals – as mentioned before – into more manageable milestones, achieved over some sub-periods of time. For each milestone, separate measurable objectives and targets can be set in a sequential or non-sequential manner, so that the link to the financial plan is obvious and easy to understand.

Some additional principles for financial goal-setting

The general principles for determining goals, known by many as SMART (specific, measurable, achievable, measurable, realistic, and time-bound), are also applicable to financial goals. Some of these were already covered above. What deserves more emphasis here is the realistic aspect. Sometimes people end up defining so many goals that some of them can basically be mutually exclusive. In other cases, one could go for a combination of a monetary amount and a short-term time frame that make it impossible to achieve. Generally, working with a financial planner or advisor can help mitigate that, as they are trained to detect such inconsistencies and unrealistic expectations and can support their clients directly in finding a better definition. But if that is not an option, then one needs to review carefully the list of goals and assess what might not make sense or might be resting on too optimistic assumptions.

Another useful way to set goals is to map out known or potential dependencies in advance. This step could be added to the above-described framework. It involves determining whether achieving each individual goal is in any way dependent on something else happening, on some other goal being achieved first, or on someone else doing or achieving something first. It can hurt your financial plans significantly if, for instance, other people fail on their promises or what they owe you. Such occurrences can literally stop you in your tracks and set you back on your timelines, delaying your progress.

Finally, I would like to mention motivation. Achieving any financial goal requires some degree of self-motivation – no one can do the work instead of you and keep you focused on getting there but you. This is especially important for mid-term and long-term goals which require much more significant commitment and determination. In your goal setting, be sure to phrase the goal and break it down, as well as assign the dimensions (timelines, amounts, etc.), in ways that make it feasible and that allow you to keep yourself going and to feel like you want to get to the end. You can think of ways to reward yourself for each milestone or to incorporate some sort of positive feedback and reinforcement for each successfully completed stage.

prioritization

This step is essential – your goals must be ranked based on your personal importance hierarchy or system. This is done so that you can pursue these goals more efficiently and on time, as certain goals will have a higher degree of urgency. For the ranking to be useful and accurate, the timelines, the opportunity costs, and the pros and cons of each goal must be factored in. Some advisors would suggest to think of each goal as belonging to one of 3 categories:
– critical or essential goals – those that can not be postponed and are related to items that are absolutely necessary (retirement savings, contributions related to medical and health needs, emergency funds, paying rent, purchasing an asset required for income generation, etc.);
– important but not crucial goals – those are related to achieving things that are high or very high priority, but in certain cases can be put off (e.g., buying a house, paying for education, paying down debt, estate planning, etc.);
– aspirational goals – those are related to preference for things that are nice to have, but are definitely not must-dos or must-haves (e.g., purchasing an investment property, going on vacation abroad, buying a high-end luxury car).

This classification, combined with the deadlines and opportunity costs can then be used to assess what priority to assign to each goal. In any case, you should not forget that with changing circumstances over time, prioritization can evolve and ranking can be reordered.