There's nothing innovative in the basic idea of setting financial goals. Its pretty much Personal Finance 101.
Example financial goals:
- Pay off debt.
- Start an emergency fund.
- Save for retirement.
- Start a business.
- Cancel gym membership.
However, having a list of generic financial goals doesn't do much to help you develop a process to make it happen.
In order to establish and apply goals effectively to improve your financial picture, let's go back to the basics of goal theory and take a look at different types of financial goals you can use to create a process that leads to success.
What is a goal?
Before we dive into types of financial goals, let's review the actual definition of a goal. For some of us, we think of a goal as a New Year's resolution, or a major desire to do this or that.
A goal is actually something much more rudimentary to human thought.
Psychologists have identified goals as our most basic elements of control. According to Alfred Adler, “we cannot think, feel, will, or act without the perception of some goal.”
Through our goals, all of our everyday thoughts, beliefs, desires, and fears are translated into action. Psychologists used this idea to develop a method to predict a person's behavior.
How do you change your financial future? It starts by altering your most basic goals in life. This requires you to actually change the way you think.
To achieve our ultimate financial outcomes, we must re-train our habits and natural tendencies to prioritize process and performance goals that lead us in the right direction.
TYPES OF FINANCIAL GOALS
There are three main types of financial goals:
- Process Goals – involve the execution of plans.
- Performance Goals – identify a specific standard to reach.
- Outcome Goals – the result of successful implementations of process and performance goals.
Process goals are basic, routine tasks that require consistency. Examples of financial process goals include:
- Track expenses daily
- Transfer funds into savings every pay day
- Invest 25% in index funds, 25% into p2p lending, 25% in real estate crowdfunding, and 25% into high yield savings
- Eat out only once per month
- Limit grocery spending to $500 per month
- Post 2 blog posts per week
In essence, process goals are the building blocks that lead to meeting performance goals. Often, effectively completing them requires forming new habits.
Performance goals are performance standards you are striving for. Examples of financial performance goals include:
- Save $25,000 this year
- Pay off all credit card debt by Christmas
- Grow annual income by 10%
- Blog traffic goal of 10,000 visitors per month
Another way to think of financial performance goals are as mid-term goals that when achieved enough times, lead directly to your desired financial outcome.
Outcome goals are long-term financial goals that when achieved, enable you to live the lifestyle you desire. Examples of financial outcome goals are:
- Reach financial independence
- Take 3 years off from your day job
- Become a millionaire
- Launch a successful company
Outcome goals are achieved by regularly completing process goals, which leads to completion of performance goals.
Process Goals —> Performance Goals —> Outcome Goals
If you're regularly completing process goals, but not achieving performance goals, tweak your process goals to make sure you've identified the correct tasks that will lead to success.
For instance, if your performance goal is to save $20,000 per year, but your process goal is to save $300 every payday, you aren't saving enough to hit your annual goal. The corrective action is to either lower your performance goal, or raise your process goal to meet it.
If your outcome goal is to become a millionaire, make sure your performance goals will ensure you can build a $1M net worth within the desired time frame. If not, find a way to increase your income, save more, or decide on a more realistic financial outcome.
Financial Goals Worksheet
Steps to Create a financial plan
- Determine your ultimate financial outcome goal. This should be a long-term goal that when achieved, allows you to enjoy the type of lifestyle you would choose if you didn't need to work to pay your bills.
- Identify 3 to 5 performance goals that will cause you to complete your outcome goal.
- Create 3 to 5 progress goals for each performance goal that when consistently completed, will cause completion of your performance goals.
- Use a habit tracker to monitor your achievement of progress goals.
- Recognize any potential roadblocks to achieve your goals like spending habits, negative net worth, lack of necessary resources, or other potential issues.
- Decide how you address roadblocks in a positive way to mitigate their affect on your financial success.
- Update worksheet at least once each year.
Understanding the three types of financial goals is important to learning how to build a process to achieve financial success.
Habitual completion of progress goals leads to successful achievement of performance goals. This, in turn, leads to achieving your ultimate financial outcome: a lifestyle you once only dreamed of.
Change your financial habits – change your life.
Are you using the 3 types of financial goals to achieve your ultimate lifestyle? Share below!