Setting financial goals can be problematic for a variety of reasons. Instead, focus on forming good money habits that step you towards your dream.
As a financial advisor, I also help clients clarify and achieve their most important goals.
The problem with setting financial goals
While goals have their good points, they can also be problematic.
- Goals can be intimidating. Many of us set a goal but don’t realise what we need to do to reach it. And so, we might start with good intentions, but fall over at the first hurdle.
- At times, we may not have anything that we really want to achieve. We may have a general idea of the kind of things we enjoy in life, but no great moon shots that we are motivated to achieve.
- Goals can be difficult to stick with. During times when other parts of our lives require additional attention, it can be easy to procrastinate. For example, the goal of saving requires self-discipline each time we consider a purchase.
- Goals can lead you to do unhelpful things in the single-minded quest to achieve them. Like betting $100,000 on a risky investment in search of a quick buck and losing it all.
And finally, even the best-intentioned goals can be derailed by things completely outside our control. Like intending to retire in five years, then having an unexpected expense sabotage your savings.
I’ve discovered that while motivational goals can be helpful, I’ve had more success by focusing on good habits.
Instead, focus on good money habits
Recent research from the Stanford Graduate School of Business supports this approach. The research assessed over 1,600 people who set various types of goals. They wanted to determine why some people achieve their goals and successfully sustain their learned behaviours, while others stop their efforts and regress.
“Regardless of the activities involved—from dieting to exercising to attending online courses—we found that those who viewed reaching their goal as a journey, rather than a destination, continued the “good” behaviours that aided their success after reaching their goal,” the researchers concluded.
I still like and have a set of goals. However, my daily habits – backed by a system of behaviours and a little willpower – are far more important.
For example, let’s take a goal of losing five kilos. Instead of focusing on the scales, I focused on three daily habits: move for more than 45 minutes every day, eat no sugar, get eight hours sleep a night.
Or a goal of saving for a house deposit. One couple set up a simple habit of putting aside one full salary (with the other available for spending) – that’s it. They stashed away $40,000 in one year.
According to the Stanford research, this approach also makes it easier to maintain momentum over the long term.
“Seeing success as complete or finite can often lead to its benefits to slip faster than they came. That’s why it’s so easy to put on those 20 pounds again… [The] research showed that if you view your completed goals through the lens of a journey rather than a destination, you’re more likely to continue those behaviours that helped you achieve these goals.”
4 good money habits to try
So, from a financial perspective, if you want to grow your wealth, what are some simple ideas you can implement to put in place ‘journey’ habits to help you get close to your ‘destination’ goals?
Here are four good money habits to take on board:
1. Pay yourself first
Most people spend first and then save what’s left over. Instead, switch this around and create the good money habit of regularly saving before you spend a cent. Simply set a target amount for each pay, as much as you comfortably can put aside, and invest this amount. You’ll be surprised by how quickly it grows.
2. Spend less on where you live
Australians pay around 23 per cent of median incomes on housing costs – that’s about $17,500 a year. If you could reduce that by just 20 per cent, that would be $3,500 in savings.
Compare that with reducing your daily coffee habit – even if you gave up two coffees a day, you would still fall short. So rather than focusing on the little expenses, think about the big ones like the cost of your residence.
Re-think the temptation to upgrade to a new residence to keep up with the “Joneses” and save the difference. A more modest home could save you significant sums, so you don’t need to sweat the small stuff.
3. Buy less
Avoid upgrading to the new phone plan, defer purchasing a new car, fix rather than replace appliances. If you do need to buy something, consider buying pre-loved – I am amazed how many near new items are available on online markets for a deep discount.
There are loads more ways to buy less and save money here.
4. Invest now
The sooner you start investing, the more opportunity you have for your money to snowball.
One of the best ways to do this is to automate payments of extra money into your super. Just $10 a day over 30 years with an average annual return of 6 per cent could turn into more than $300,000.
Introducing these small money habits can help you to consistently and successfully build your financial wealth over time – and hopefully make it relatively easy along the way.