“What you get by achieving your goals is not as important as what you become by achieving your goals.” –Henry David Thoreau
There are hundreds of self-help resources that espouse the value of having clear and specific goals, and this site is no exception. Ideally goals should be incremental and have clear “stages” or “way-points” where one can assess their progress and results.
By virtue of the numerical nature of personal finance, it is generally pretty easy to see where you are and define where you want to go.
The level of complexity/ simplicity that you decide to use when setting your goal is up to you, but the underlying core equations are:
Income – Expenses = Surplus/(Deficit)
Current Financial Position +/- Surplus/(Deficit) = Future Position
From these core equations comes the the following two basic methods of defining your goal and measuring your progress:
Absolute Surplus – State a specific amount that you want to save or accrue per week or fortnight. E.g. I want to save $200 a week. Is for salary and wage earners with regular and reliable cashflows.
Relative Surplus – Nominate a percentage allocation of your total income for expenses and saving. E.g. I will save 40% of any income that comes through my hands. Is perfect for students or people with irregular income who want to save and get in good financial habits.
Absolute surpluses are conducive of financial position or net-worth final goals.
Relative surpluses encourage good financial habits and discipline.
The type of goal you set will depend on your current life circumstances.
Choose a method and write your goal, being as specific as possible.
If your goal is a absolute surplus based goal, write down what your current financial position is by taking the total of your assets (savings accounts, shares etc.) and subtracting your liabilities (debts and loans). Then using your surplus amount work out how many surpluses it will take to get there. Make sure your first goal is no more then three months away. You’ll set bigger and longer term goals in the future but for now it’s important for the goal to remain in the forefront of your mind.
For example, if you worked out you can save $100 a week. Your goal might be to save a thousand dollars, which will take you 10 weeks. You would write:
I will have a networth of $1,000 in 70 days.
Then make a couple of intermediary checkpoints.
- I will have a networth of $300 in 21 days.
- I will have a networth of $600 in 42 days.
If it’s a relative surplus based goal, write down the allocation of savings you would ideally like to achieve and then some intermediary allocations. This is important as relative surplus goals are about behavior change and it is extraordinarily hard to just self-initiate a change in your own habits.
For example if you were aiming for 30% savings of income, you might choose.
- In January, I will save 10% of all income I receive.
- In February, I will save 20% of all income I receive.
- In March, I will save 30% of all income I receive.
Both types of goals require you to track your progress. An absolute surplus goal can be tracked with a savings account that you deposit your surplus into each time period. A relative surplus goal also uses a savings account, but will require to keep track of your total income for the time period. You’d check your progress by dividing the total deposits for a period by the total income for a period.
Note: For readers who are in debt or have home loans, in the vast majority of cases it is better to put your surplus towards reducing your debt or putting it into an offset account for your home loan. Therefore you should measure your goal by tracking movement in your net-worth.
Don’t make goals or set targets based on what you think others are doing, set them for yourself no matter how small, embarrassing or impossible they seem. With time your financial way-points will merge into habit and you will achieve your goals effortlessly, as you will have integrated the goal into your life style. The other pages in the Personal Finance section have practical ways you can increase your nominal or relative surpluses and smash your goals.