Why Setting Clear Goals is Vital for Financial Planning

A successful financial plan has many key components, for example, investments, protection, and tax efficiency. But the most important part of any financial plan is making sure that you achieve your goals. The other aspects are simply the tools to allow you to get there.

For a financial plan to be effective, you need to have some clear goals in place.

It Makes Decisions Easier

When you save or invest, the eventual value of your pot is most likely dependent on two things – the amount you contribute and the investment growth. If you take a low level of risk and achieve modest returns, you might need to pay in more than someone who was prepared to take more risk.

Without having a goal in mind, these figures are arbitrary. If you don’t know how much you need, it’s difficult to make decisions around contribution levels, risk, and investment choices.

Once you know what you are trying to achieve, this process becomes easier. You can test out different scenarios to balance contribution levels and investment returns.

You can also use this process to make other decisions, for example, whether you can afford to spend more or make gifts and still achieve your goals.

It Helps You Stay on Track

When you have a goal to work towards, your annual financial statements can start to make more sense. Reviewing your finances can help you assess whether you are on track or whether any adjustments need to be made.

When we make financial planning assumptions, such as the rate of investment growth or inflation, we only know one thing with a degree of certainty – the figures we use at outset may be wrong. You can make a reasonable guess and come close to a long-term average, but in the shorter term, you can expect to see more ups and downs.

If the market falls or you need to take an unexpected withdrawal, chances are that your long-term plan won’t be significantly affected. The ups and downs tend to smooth out over time.

But if some adjustment is needed, it is far better to identify this early. A small tweak to your saving or spending patterns can potentially make a big difference over a long period of time. It is only by having goals in the first place that you have a way to measure your progress.

It Can Keep You Motivated

We all know that we should pay into a pension and should probably be saving more. But retirement can feel like a long way off, and no one knows how the future will play out. It’s easy to get distracted by daily life and let other priorities take over.

If you visualise your goal, it becomes more real in your mind. If you can picture your ideal retirement, perfect holiday, or buying your dream home, this can give you a strong motivation to start working towards it. Making changes to your habits, such as saving money and investing regularly, becomes easier if you have a clear purpose.

Getting started is the most difficult part. You need to establish your goals, work out how to achieve them, and incorporate this into your financial plan. But once you have taken these first steps, maintaining the plan and staying on track is actually fairly simple.

How to Approach Goal Setting

To be effective, a goal needs to be more than a vague idea or wish. The most useful goals are SMART:

• Specific – how much money do you need to achieve your goal and how will it be used? This may involve some research, for example, reviewing your income and expenditure to work out how much you need to live on in retirement.
• Measurable – you need to be able to check your progress and know when your goal is achieved.
• Achievable – goals should be challenging but realistic. If your goals are too far out of reach, this can become demotivating.
• Relevant – your goal should be important and meaningful. Adding too many goals to impress others, or because you think you should, will probably sap your motivation.
• Time-bound – you should include a deadline for your goal, otherwise it is too easy to put it off. This deadline can be adjusted later if required.

To start with, it’s a good idea to make a list of goals, and prioritise the ones that are important to you.

Goals are usually more effective when they are written down. Once you have decided which goals to prioritise, start to build up as much detail as possible. Remember, you can change this at any time

Next, you need to work out where you are now and establish the steps you need to take to achieve your goals. This may be fairly simple, for example, increasing your pension contributions might be enough to achieve your retirement goal. If you have multiple goals over different time periods, a combination of approaches will be needed.

A financial planner can help you balance current priorities, investment risks, and tax planning to achieve your goals in the most efficient way.

Please don’t hesitate to contact a member of the team to find out more about how financial planning can help you achieve your goals.

The content in this article was correct on 22/07/2023.