How to Set Yearly Financial Goals
The Importance of Setting Financial Goals
As we turn the corner on a new year, now is a great time to take a look back at your previous years goals and set new ones for next year. Setting financial goals is crucial to your success in attaining the lifestyle you want, but how do you do it? As the saying goes, “If you fail to plan, you are planning to fail.” and nothing could be more true than in personal finance. The best part of having a goal is that you know when you’ve gotten there. If you fail to track what you hope to achieve each year then how are you suppose to pat yourself on the back for crushing it last year?
The good news is, setting financial goals doesn’t have to be difficult. The hard part is freeing up funds to be able to invest. Once you do that, the process should be automated as much as possible to fund your goals. If you have a consistent paycheck it certainly makes the process a lot easier. If not, the process will be a bit more manual but still achievable. Let’s discuss how to set your financial goals and how to execute on them.
Step 1: Set goals and automate as much of them as you can
Setting financial goals can take many forms. Maybe you’re buying a new home, a new car, or taking on a new business venture. Whatever your goals are it’s crucial to write them down and to build a plan on how you’re going to achieve them. Some level of whimsical hope is expected and even necessary, but don’t leave it at that.
Take the time to really consider how you’ll meet the goals you want and even more importantly take the time to make sure those are the goals you want to set that will lead to your long term happiness. Once your goals are set it’s time to get to work and to automate everything you can. If you can be automated, do it, it’ll make everything a lot easier. Set up your financial life goals no different than you set up automatic bill pay for electricity and water. For the components you can’t automate, keep a keen eye on how things are going and make micro adjustments throughout the year to keep yourself on track.
our 2018 savings goals:
In my previous post, I outlined our 2018 savings goals, how we were planning on doing it, and how it came out to roughly 56% of our income. This year we’ll be setting even more aggressive goals and making adjustments based on income and life circumstances. For example, we received some exciting news that we’ll be expecting our third child in April. This will certainly bring some new expenses and challenges as we attempt to hit our goals this year.
How we did in 2018
I’ll get into more detail with how we did with meeting all these goals in step 2, but we did pretty well and the main reason is because we automated the process. Out of all these goals the only two that didn’t have an automatic deposit was my wife’s IRA, which we were able to fund through general savings and an after tax brokerage account.
Step 2: Reflect on your previous year goals
Goals and plans are only so helpful if don’t go back and look at how you did. The reason it’s crucial to reflect on your previous years goals is find out how you did, make any necessary adjustments, as well as tip a hat to yourself for what you did well.
how did we do with our goals?
We met all our goals for 2018 other than funding the 10k into an after tax brokerage account. What went wrong? Well, as I’ve written about in the past, the social pressures and necessities that come along with home ownership reared its head in 2018 and we made the decision to fund some house projects to finish updating our house. The good news is we had the funds because of our plan to fund the 10k in an after tax account, the money was just in a savings account and instead of putting it into our after tax brokerage account, we paid for the home improvements.
We technically saved enough but we made a conscious decision to use the money to fund a bathroom remodel and put a new fence up in our back yard instead of putting it in the after tax account.
Personal finance isn’t about being perfect, it’s about making the right decisions for you and your family and in some cases it’s not the best financial decision.
I’d much rather have the 10k in our brokerage account when considering finances alone, but every time we use our newly updated bathroom I never regret making that decision. We don’t allow ourselves to spend much on unnecessary things but we know life isn’t about deprivation either. We made the family decision to use those funds in a different way because the end goal isn’t wealth, it’s happiness. Most things won’t bring you more happiness, but in the case of our bathroom, I feel comfortable saying it did.
I always preach balance, and even though funding the after tax account would have build more long term wealth, we decided in this scenario the short term reward was worth the lost long term gain. Financial hipster isn’t about being perfect, it’s about making good financial and life decisions.
How to be successful Meeting Your Financial Goals
You might get tired of hearing about it, but for us, it’s automation. It’s no coincidence that I set up direct deposits to my Roth IRA, work 401k, kids college 529’s, and our HSA and we met those goals. Those goals were completely automated. The remainder of my paycheck and my wife’s earnings go into our savings and her checking respectively and we were able to fund her IRA but it was manual and almost didn’t happen. We had to make the extra effort to go in and transfer money to meet that goal - not ideal. Automation is so amazing because of how it changes things psychologically.
It’s easy to spend money you have, but if it automatically goes into accounts you don’t touch, you’re very likely to never touch it.
Step 3: Make adjustments and set new goals
Determine what you Could HAve Done Better And How You plan to improve
The final step in working your financial plan is to make adjustments to what you’ve learned from your mistakes in steps 1 and 2. Tracking goals isn’t very helpful if you don’t do anything with the information. So this is where you have to get creative and try new things so you can do even better this year!
Our 2018 adjustments
In reflecting on last years plan there are a two challenges that we’ve discovered and decided to tackle with the belief that it will make us more successful next year.
Challenge # 1: Building a means to automate inconsistent income
Like any entrepreneur, my wife’s income from her photography and video business fluctuates throughout the year. While this ebb and flow is expected, it still brings challenges with tracking what is coming in and coming out. As I mentioned in step 2, automating the funding of our savings using direct deposit is our preferred method of automation and its hard to do that when the flow of income lacks consistency.
Our Plan: We need a better way to automate inconsistent business income so we can build a plan on how to use it to fund our goals. The adjustment we are making is to better divide the money we can save from her income and the money that she needs for business expenses. Last year, it was way to jumbled together. This year, the plan is to have all the money that she needs for business expenses in one account and the rest will immediately go into our savings so we know that money is available. In the past, it would sit in her business account and we would transfer over to savings randomly which made it difficult to build a solid plan around that source of income. With the money going into savings right away, we will develop a customized method to automate the things we weren’t able to last year.
Challenge # 2: Better expense tracking
It’s going to sound weird to say this, but tracking expenses isn’t something we’re anal-retentive about. I know, what? ‘Who is this guy?’ Well, thanks to automated savings, we’ve gotten away with not needing to be crazy budgeters or expense trackers and spend what we want, when we want from any of the money that is left over after funding our goals. This has been successful for us to this point because we’ve set such aggressive goals. Frankly, we don’t have enough money left over each month after our automated savings goals are fed to make poor decisions. In the upcoming year however, we want to get a better understanding of exactly how much we spend each year and where. This will allow us to make any necessary improvements to our spending habits in the future. It’s hard to learn, see patterns and make adjustments when you’r spending from multiple accounts.
Our Plan: We wanted to find a way to only spend out of one account for all of our living expenses. Where before, we were spending out of our joint account and also from my wife’s photography profits in a different account. After some discussion, we developed a plan that allowed her to keep enough in her business account to cover only her business expenses and everything else goes directly into our joint account.
Personal finance is often more about psychology than it is the numbers. Seeing everything come out of one account makes use more accountable and gives us greater insight to the overall picture of our finances. Though this sounds like a small shift, and it is, it allows us to better control how we invest her profits.
Our New yearly goal
As you can see, our goals for 2019 are almost exactly the same as 2018 but reflect all the changes in the max contributions for retirement and HSA and adding additional 529 savings for our new arrival coming this year. Since there hasn’t been an increase in what you can deduct from our state income for our Ohio 529 so we are keeping our contributions at 4k per child.
With the addition of our third child and my wife scaling back on her business during her maternity leave, these goals are aggressive, but I like how Bruce Lee put it:
A goal is not always meant to be reached, it often serves simply as something to aim at. - Bruce Lee -