How to set financial goals

Your money might have a long to-do list: pay off debt, save for retirement, cover petrol and groceries. And that's before you have even got to what you want to do with your cash (think: holidays, dinners out, upgraded computers). With so many jobs to do, it can be difficult to tell exactly which should come first.

Here is our framework for how to create, prioritise, and then tackle your financial goals.
 

Financial goal examples

While the monetary amounts involved will vary from person to person, many of us share a number of money goals that can be sorted by time frame: short-, medium-, and long-term. Here are some common financial goal examples and the time you might expect to achieve them:

• Start funding an emergency savings account (One month to a year)
• Save for a car down payment (One to five years)  
• Buy a house (more than five years)
   

How to set financial goals

Now, saving for one financial goal with a given "due by" date may not feel all that challenging. The trouble is you probably never have just one goal competing for your money's attention. Here are some of the most important financial goals to put on your radar and how to attack them.

1. Understand your essential expenses, your take-home pay, and your interest rates

It sounds basic—just getting a grasp on the actual numbers involved in your financial situation. And yet, when was the last time you pored over your pay stubs and monthly account statements? You should know what you have coming in and going out each month before you can optimise reaching bigger financial goals. Take a moment to check your spending.

2. Make a budget

To reach your financial goals, you will have to make sure you are spending less than you make, and one of the most effective ways to do that is by creating a budget. A simple place to start is with the “Plan Your Pay” framework, where you allocate:

• At least 10% of your pre-tax income for retirement, including any employer contributions (if applicable) (noting the amount you need to save will vary depending on your location and individual circumstances),
• 60% or less of your monthly take-home pay to essential expenses,
• 30% or less of your take-home pay for “nice to have” discretionary spending,
• 10% or more of your take-home pay to near-term goals and emergency savings.

These percentages aren’t strict rules; they are flexible targets to help you structure your money in a way that supports your goals. And because your life and finances change over time, it is important to revisit your budget regularly to make sure it still works for your current situation. Use our budgeting tool to help you get started.

3. Maintain at least minimum insurance coverage through your employer (if applicable)

Insurance helps protect you from life's uncertainties. Ensuring you have enough coverage should be a high priority as you create your financial roadmap. So, opt into the health, life, and disability plans available to you. These types of insurance are often easier (and less expensive) to get through employers, and while they are a crucial part of any financial plan, they are especially vital if you don't have enough emergency savings to cover the types of catastrophic events they protect against.

4. Build an emergency savings

If you do not have any emergency savings yet, work on this goal next. Like insurance, emergency savings is part of the financial safety net you should prioritise building to protect yourself from life's surprises.  As you can, you should work to save 3 to 6 months' worth of basic living expenses. If that is too much to save right now, make small contributions each month (like paying a bill) and over time it will build to be your financial safety net. And do not forget: You should prioritise replenishing your emergency account after you have withdrawn from it. For more details, check out our article on emergency savings.

5. Get your employer match

When you are trying to make ends meet, saving for retirement might not be a top priority. But if you have access to a workplace retirement plan—and any sort of employer match including employee stock share plans or subsidies—do not miss out on an easy way to instantly increase your investment. (If you're not contributing up to the employer match amount, you are leaving free money on the table.) As you get the rest of your financial house in order, you can boost how much you contribute to your workplace retirement plan and receive extra compensation (if employer matches are offered). For more information on retirement savings, be sure to check out our article on four guidelines for retirement savings.

6. Pay down credit card debt

Credit card debt is some of the most expensive debt out there because of the high interest rates. Make sure you are at least covering your minimum monthly payment, but work toward paying more than that every month until you have zeroed out what you owe. The quicker you can pay off any outstanding credit card balances, the less this debt will cost you in interest payments. The money you pay in interest could have been used to apply towards your other financial goals. For more information, check out our article on how to use credit cards wisely.

7. Save for something special

Saving for certain goals can seem like eating your financial vegetables. Meaning, it is good for you in the long run, but it may not feel fun, exciting, or immediately rewarding. While it's important to plan for retirement, it's also helpful to include moments of more instant gratification. Maybe you want to go on a big anniversary trip or plan a reunion. Work to find ways to include these fun goals through the various pitstops on your financial goal roadmap to reward yourself and keep up your motivation.

8. Pay down other high-interest debt

Not all debt is created equal. How you prioritise paying it off often depends on the interest rate. One common strategy targets paying off debts with higher interest rates as soon as you can. While it may seem counterintuitive to not chip away at all your debt, it's worth considering the potential advantages of investing your money, especially in areas that have historically delivered solid long‑term returns, rather than rushing to pay off debt with relatively low interest rates. Individual situations vary, and some countries may have higher rates to be concerned with, so be sure to read our guide on two methods to pay off debt. You can also use our debt management tool to help you keep track of your debt.

9. Maximise your tax-advantaged account contributions

Now's the time to flip your investment contributions into high gear. Aim to put the most you can into the tax-advantaged accounts (if applicable in your country). That includes everything from a health savings plan to a workplace retirement plan to a personal retirement account. These accounts can help give your investments an extra advantage by avoiding paying taxes on either what you put into them or what you take out (depending on your location).

10. Consider investing

When you have completed the above steps, you may start to have room in your budget to consider investing any additional funds you may have. Before investing, there are three factors to consider: time horizon, risk tolerance, and diversification. It is essential to be realistic with yourself and understand your tolerance for risk. Typically, the higher the return on investment, the greater the risk. Investing a small amount on a weekly, monthly, or quarterly basis can help avoid making short-term decisions spurred by market volatility. Diversifying your investment portfolio can also help reduce your risk during a down market. Investing can be tricky and sometimes overwhelming; be sure to seek professional advice when you have questions.
 

Considerations for hitting your financial goals

Whether you've got a financial goal you hope to meet tomorrow or in 40 years, keep the following considerations in mind to up your chances of being successful.

Set specific, attainable, quantifiable goals

Make sure you can clearly articulate how much you need to save for each of your goals, as well as the path you will take to get there. Consider the difference between "save for a down payment" and "I'd like to have 24,000 for a down payment in 4 years, so I'll save 500 a month." With the second statement, you know exactly what it's going to take to get from your current state to your new home. Our savings tracking tool can help you get the full picture of what you may need to save each month to achieve your goals.

Consider separate accounts for each goal

This approach is known as "bucketing," and it helps you keep a clear tally of how much you have saved toward each goal. Not only does this keep you from having to figure out what part of your slush fund is earmarked for what, but it also may motivate you to save more. Think about the happiness you will feel each time you deposit more cash into your wedding or holiday fund.  

Pick the right account types

There's no one-size-fits-all account when it comes to financial goals. You will want a range to meet your goals efficiently. For short-term goals, you want your money to be safe and “liquid,” or easily accessible as cash for when you need it. That's when you might consider a money market account or a high-interest savings account that can all but assure that you will have your money when you need it. For retirement savings goals, though, you might prefer to position yourself for greater potential returns—and oftentimes that may mean putting your money in the stock market. This can sometimes include tax advantages in addition to compounded returns if invested appropriately and given time to grow.

Automate contributions whenever you can

Nobody wants the headache of having to switch their cash between their various accounts. Instead, set up automatic contributions from your pay cheque or recurring transfers from a main checking account to other goal-based accounts. The less you have to think about, the easier it is to save.