How To Set And Meet Financial Goals: The Ultimate Guide

Jake - Author/Founder

Jake - Author/Founder

Hi. I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

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What is your financial vision?

Maybe it’s financial security, becoming work-optional, putting your kids through school, or saving for a new car.

To meet these goals, you must distill your vision of the future into bite-sized pieces…… habits, systems, and specific financial decisions you can execute today.

I share goal-setting process I use to meet my own financial goals. I’ve used the same overall process over the past five years of leading teams to meet organizational goals. 

First, I cover a four-step top-down approach to meeting your financial goals.

I then cover a “bottom-up” approach with a two-step process. Here you focus on habits and systems to produce the desired future vision.

Setting a goal is easy. Taking action to meet the goal is hard. In the end, I will discuss ways to overcome this. 

Let’s start with the story of George, who uses a top-down approach to set his financial independence goal. 

Table of Contents

A Financial Independence Story: Visionary Goal, Habits, and Capacity

George is 20 years old, has no consumer debt, and has a fully funded emergency fund. 

He has an aggressive vision to be work-optional by age 45.  This is his “visionary goal.” 

He breaks down his academic goal into SMART financial goals, where SMART stands for Specific, Measurable, Attainable, Realistic and Time-bound. 

George now estimates annual expenses at age 45 to be $60,000. George sees that he needs at least $60,000 in investment income by age 45, which must increase with inflation. 

So, how large of an investment nest egg does George need by age 45? 

After some research on safe withdrawal rates (SWRs), he settles on a 3% SWR. 

At a 3% annual SWR, George requires a $2,000,000 investment portfolio by age 45 to produce $60,000 in annual investment income (3% of $2 million = $60,000).  

Systems, Habits, Decisions

After learning about index funds, risk tolerance, and historical market returns, George decides to invest in globally diversified index funds. He expects an 8% annual return over the 25 year period.

Using a compound growth calculator, George transforms his $2,000,000 investment goal into a  goal to invest $2,100/month in a global stock index ETF. This is George’s investing system.

To save (and invest) $2,100 per month, George needs to increase his income and/or cut expenses.

After assessing his expenses, George decides to build frugal living habits. Such habits include meal prep, biking to work, and engaging in low/zero-cost hobbies like reading, hiking and weight lifting.

In addition, George carefully evaluates decisions such as the rent-vs-buy decisionwhere to live, what to drive, and what friends to hang with.

Finally, George decides he needs to boost his earnings power. As a project manager, he invests in his human capital by pursuing the Project Management Professional (PMP) certification.

George knows that those with the PMP earn 32% more in the US and 17% more in Canada (source).

Gaining the PMP requires weeknight and weekend study habits. 

Finally, George only focuses on things within his control. He doesn’t care about day-day, month-month or year-year stock market volatility.

Instead, George only focuses on decisions/habits/systems that are in his control.  His focus is on the journey, not the outcome.  

Increase Capacity To Fuel Habits, Decisions, and Systems

George is busy. He realizes he must increase his productivity to meet his goals.

More specifically, George must increase his motivation, focus and energy levels. Energy is useless when scattered across various tasks.

George, therefore, builds habits and systems, such as:

  • Strength training and cardio enhance energy levels and limit cognitive decline.
  • Viewing morning sunlight to sleep better
  • Avoiding alcohol to maximize motivation and drive
  • Eating healthy to enhance sleep and focus
  • Meditating to enhance focus
  • Avoiding social media to retain attention span (focus)
  • Two minute cold showers to trigger dopamine release for motivation and improved capacity to endure hardship

George is very hardcore. That’s for sure.

I aim to be like George, but I’m not perfect. It’s a constant battle of present Jake vs future  Jake. 

One thing we can learn from George is the process used to down goals into manageable habits, decisions and systems. 

Step 1: Set Big Visionary Goals

Your vision of the future drives your goals. These goals are often vague and attached to emotion. 

Examples of such visionary financial goals include: 

  • I want to flexibility to work wherever I want
  • I want financial security
  • I never want to worry about money again 

Then there are life goals: 

  • I want sufficient time available to improve my health and fitness
  • I want to ensure quality education for my kids 
  • I want to build a new ice rink in my childhood community

Money can buy time and amplify your impact on the world. 

Identify Goal Blind Spots

Research shows that you (and I) tend to “miss” important objectives that we will later find important.

For example, when people look back at their goals, only half of the objectives remain relevant. A 50% accuracy rate is not okay.

Similarly, Morningstar’s “Mining For Goals” study found that exposure to a master goals list caused 26% of participants to change their top goal and 73% of participants to change one of their top 3 goals. 

This may sound very bad, but there is some good news. There are a few ways to mitigate goal blind spots. Here is a system from a goal survey from PWL Capital: 

  • Write down your goals without outside help
  • Double your number of goals
  • Refer to a master goal list

Use A Master Goal List

Looking at a master goal list can help you find goal blind spots. The list contains financial goals set by others.

Here are some common goals from a master goal list taken directly from PWL Capital’s goal survey of 310 people, most aged between 25 and 34. 

Vague emotion-driven goals are a great starting point. 

But to facilitate action, these visionary goals must be translated into specific financial goals. They can then be broken into income, expense, or investing goals. 

You can produce a set of habits, systems, and specific decisions from there. Finally, you take action

Step 2: Set Large Scale SMART Financial Goals

The breakdown of visionary goals into large-scale financial goals is best shown through example.  

Infographic: Visionary Gaol to SMART Goal

Note that these financial goals are “SMART”: 

  • Specific
  • Measurable
  • Attainable
  • Realistic
  • Time-bound 

These large goals serve two main purposes: 

  • They give you clear targets to aim for
  • They are the starting point to pull the goal into the present by breaking it into managable chunks. 
Infographic On SMART Goals

You may be wondering, what’s the difference between achievable and realistic? 

Achievable goals can be met if you devote all your time and energy toward the goal.
 
For example, starting a business that requires 40 hours/week may not be realistic while working full-time and raising kids.
 
A goal can be achievable but not realistic. Life is a balance.
 

From Visionary Goal To SMART Goals: The Wealth Building Journey

You won’t be able to set large-scale SMART goals without some financial knowledge. At the biggest scale, the wealth-building journey is important.

I like Dave Ramsey’s baby steps as an outline of the wealth-building journey, as per the video below.

The personal finance steps will help you sequence your goals correctly. For example, you are not ready to invest if you have $10,000 of credit card debt. 

In addition, more profound knowledge of investing and retirement planning may be required.

For example, it is impossible to set a target Financial Independence portfolio size without understanding safe withdrawal rates. 

Personal Finance Steps

SMART Goals, Procrastination and Failure

The specific and time-bounded nature of SMART goals sets clear criteria for failure. 

By setting SMART goals, you take on the burden of responsibility.  This can incentivize procrastination, something I battle with like everyone else.

Now it’s time for the SMART goal cascade, where you break big financial goals into smaller expense, income or investing goals.   

Step 3: The SMART Goal Cascade To Monthly Savings and Investing Goals

What does financial independence, saving for a vacation, debt paydown, or building an emergency fund have in common?

They are fueled by the gap between your income and your expenses. This is why your savings rate is one of the two most important factors in growing wealth. 

SMART Monthly Savings Targets

Monthly savings fuel debt paydown goals, short-term saving goals and long-term investing goals. Here are some examples: 

  • “Pay $1,000/month to erase $6k of credit card debt in 6 months.”
  • “Save $200/month in a sinking fund for ten months to buy an engagement ring.”
  • “I want to save $1,000/month for a home down payment for four years.” 
  • “Put $1,000/month extra against my mortgage  to be mortgage-free in 10 years.”
  • “Allocate $500/month to max out my TFSA (Roth IRA) to invest in stock/bond index funds”

Cut Expenses vs Increase Income

Now that you have a monthly savings target, you may wonder: “Do I focus on cutting expenses or increasing income?”

This depends on:

  • Your tax rate
  • The ease with which you can earn more income
  • How many of your current expenses are “wants” vs musts.”

For example, a high earner with a 50% marginal tax rate will be better of cutting $1000/month in non-essential expenses rather than earning an extra $1000/month.

I cover more considerations in the post Cut Expenses Vs. Increase Income to Meet Savings Goals. 

You can track and plan expenses with this Google Sheets Tool, and you can find specific expense management tips in these articles:

Once expenses are under control, income habits become critical.

SMART Investing Goals

Investing becomes relevant once you are ready to invest. The financial situation of someone ready to invest often looks like this: 

  1.  Zero consumer debt
  2.  A fully funded emergency fund (3-6 months of essential expenses, held as CASH)
  3.  A goal more than five years in the future. 

Investing goals are more complicated than savings goals. They require that you understand compound growth, index funds, historical stock and bond returns, safe withdrawal rates and knowledge of your risk tolerance. 

Let’s go through an example to show the process of investing goal breakdown. His wife has a baby today, and they want $200,000 in 20 years to pay for tuition. Fred figures out his risk tolerance and decides he can tolerate a 100% stock portfolio. He then assumes an 8% annual return based on historical global stock index returns.  

Using a compound growth calculator, Fred figures out that he will need to invest $350/month into a globally diversified stock index fund to meet his goal. 

Freddy also understands that he may endure a 50% crash during his 20-year investing journey. He knows he will feel uncomfortable due to loss aversion, but he is confident he will be able to sleep at night and remain invested. 

Finally, he understands that the 8% return over 20 years is far from guaranteed. There will always be risks to his goal. 

The Goal Cascade and Learning

Financial knowledge is required to set financial goals: 

Using your monthly savings to pay down debt? You need knowledge of the debt snowball or debt avalanche methods. 

Building an emergency fund?  A solid emergency fund equals 3-6 months of essential expenses held as cash.  

Setting an investing goal? You need to understand investment risk, risk tolerance, historical asset returns, index funds and tax-sheltered accounts like the TFSA.  

As you break down goals, you will find knowledge gaps. This is a good thing. The goal cascade naturally structures learning and laces your education with purpose. 

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Step 4: Set Habits, Systems and Decisions

By this point, your future dreams are transformed into monthly savings and investing goals. 

Now it’s time to turn these goals into habits, systems and decisions you can execute

Humans are good at setting goals but bad at taking action to meet goals. 

Then the magic occurs when you execute habits, systems, and specific decisions. You must DO. 

Finally, habits, systems and decisions require focus, energy and self-discipline. This is one of many common points between personal finance and fitness.  

Habits

Good habits hum in the background while you go about your life. Demands on your self-discipline are minimal once the habit is set. 

Habits are “discipline-efficient”.

Layering many tiny habits can have massive effects. This is why habits are the compound growth of self-improvement. It is the premise of James Clear’s book Atomic Habits.  

Your habits are responsible for many of your expenses and your earnings power (human capital). 

Habit Progression Infographic

For more on “habit management”, I will refer you to the habit guru James Clear. Here is his guide, with everything you need to change habits. 

I build habits successfully by focusing on one habit at a time. No more than one habit a month. Otherwise, I fail and build zero new habits. 

Expense Habits

After reviewing your expenses by looking at debit/credit card statements, you may notice expenses attached to underlying habits.

Such habits may include scrolling Amazon when bored, eating at restaurants twice a week, and hitting the drive-thru for lunch. 

These habits can be replaced with reading while bored, dinner dates at home, and meal prep. 

Now for the most destructive habit in my assessment: buy-now-pay-later tendencies.

The habit of stealing from your future turns lump sum costs into small future payments. This is the opposite of delayed gratification, the opposite of self-discipline. 

Buy-now-pay-later is anti-wealth behaviour, even if it makes sense numerically, like 0% financing. 

Learn more about expense habits in this post. 

Habits And Your Capacity

Exercise, sleep and nutrition enhance energy and self-discipline (the key to building wealth).

And energy, focus and self-discipline help you build new habits.

What fuels exercise, nutrition and good sleep? 

Habits do! 

See the positive feedback loop? 

For more ways to increase your capacity to execute, check out tools to manage dopamine to improve motivation. I will eventually write a post about this. 

Systems/Processes

A system/process outlines the sequence and timing of activities. A recipe is a good example.

An expense management process would be to sit down every 6 months and conduct an expense review of the past two months’ debit/credit card statements. This tells you where your money is going. 

Another example is to call insurance, phone and internet and providers yearly to get the best price. 

Systems are great for expenses, but they are more important for investing.

Investing Systems

Here is the most simple investing system I can think of:

Automate a transfer from each paycheck to contribute to an asset allocation ETF with Distribution Reinvestment enabled.

Human emotions, rooted in loss aversion, motivate you (and me) to buy high and sell low.

Automated investing systems produce consistency that eradicates behavioural errors. Automation is the ideal example of this.

Simplicity enables consistency, allowing you to focus on life while investments compound in the background.

In my post, How To Invest In Index ETFs For Canadians, you can learn more about how to set a step-by-step DIY investing system.

Decisions

Decisions influence your environment, and your environment influences expense and income habits. 

 Decisions that dictate your environment include:

  • The people you decide to have in your life
  • Where you decide to live
  • The car you decide to drive
  • The education you decide to pursue.

It’s hard to break the habit of eating cookies if there are cookies on the counter. It’s easier if you decide not to buy the cookies. That’s engineering your environment.

With your decisions, you can create an environment that makes bad habits hard and good habits easy. 

The Friend Decision

The people you decide to have in your life is a huge part of your enviornment. Humans are social creatures; friends influence income/expense habits more than you (and I) like to admit. 

Expenses will be lower with a friend group that goes mountain biking every week than with a friend group that goes to the bar every week. 

In addition, you will earn more when surrounded by friends that push you to meet your goals, rather than those that respond with envy. 

Expense Decisions

Your most significant expense decision is your choice of home, including size, proximity to work and the rent vs. buy decision. 

This singular decision dictates the following expenses for decades:

  • Commute costs (time + fuel)
  • Heating costs
  • Mortgage interest 
  • Maintenance costs 

I bet your vehicle is the next most significant expense decision, driving costs like:

  • Maintenance
  • Vehicle depreciation
  • Fuel
  • Insurance costs. 

I decide to buy used economy vehicles (Hondas) with cash to limit vehicle depreciation expenses. That’s how I drive my 2010 civic for an equivalent car payment of $33/month. 

The Bottom Up Approach (Stoic Approach)

I use the top-down approach for setting short-term savings goals, but not for long-term wealth goals. 

Instead, I use a bottom-up approach that looks like this:

  • Start at step 1 and write down your vague visionary goals
  • Skip to the “bottom” and focus all your efforts on habits, decisions and systems.

Under this system, you skip the intermediate SMART Financial Goals and the goal cascade.

Instead, you focus 100% on the three pillars of wealth (saving and investing):

These things are 100% within your control.

Internal Locus of Control

I use the bottom-up approach for investing goals as it helps me detach from the outcome.

For example, I’ve reduced emphasis on my SMART goal to be a millionaire by 40. To reach the outcome of $1,000,000 by age 40, I need an 8% market return over the next ten years.

I have no control over market returns. Zero. Efforts allocated to caring about market returns are energy not spent on present-day habits, systems, and decisions.

The stoics would approve.

Naturally, detachment from outcome helps me shrug off fluctuations in my investment portfolio.

I find I am better able to remain invested to reap the market’s returns. 

On a related note, detachment is a requirement for sound leadership, as discussed in the book Dichotomy of Leadership and Extreme Ownership.

Conclusion

Money is a means to meet life goals. It does not enhance well-being on its own.

To meet financial goals, you must write down your visionary goals. From there, you can select the top-down or bottom-up approach.

To break down your goals, financial literacy is required.

The magic happens when you execute habits, systems and decisions.

Success in executing is based on your energy, focus and self-discipline. These, in turn, are mediated by lifestyle habits.

Not only are these lifestyle habits critical to increasing financial wealth, but they also facilitate a wealthy life in many other ways.

 For help with goal breakdown, you can book your first 30 minute coaching session for free. 

Jake out.

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