How to Set Financial Goals (And Why Are They Important?)

All investors understand the importance of setting goals and establishing long-term financial goals.

While it might seem like an obvious first step, you’d be surprised how many people forget to consider their major objectives and instead jump in at the deep end.

Similarly, many people overestimate the value of their own capital or a wider portfolio, which can put them in a bad position from the start.

Having a good understanding of what you have and what you need is a great way of setting broader objectives, which can then be broken down into smaller milestones.

But why is setting long-term goals so important?

What is considered a long-term goal?

Short and long-term goals will vary depending on a multitude of different factors, making it important for you to decide what constitutes the larger, more important ‘long-term’ goals.

Generally speaking, long-term goals will be broad milestones over a minimum of five to ten years and consist of multiple stages.

Examples of a long-term goal could include early retirement, buying a second property or a new car.

More often than not, long-term goals will change with your age and personal circumstances, although themes such as financial security are usually consistent.

If we consider property investment as a route to achieving financial freedom, paying off a mortgage may be a milestone to reaching this wider objective.

Short-term goals, on the other hand, are usually achievable within a few years and could include paying off a credit card or saving for a deposit. Once you have this distinction between the two, you can start using short-term goals to build up to larger milestones.

What are common investment and savings goals?

Saving and investing are increasingly more prominent themes in modern life.

Although assets such as stocks and property have always been considerations, newer assets such as cryptocurrency and NFTs have pulled the investment sector into sharp focus.

Research also suggests that younger generations are more likely to start saving or investing early, suggesting that they have long-term goals at the forefront of their minds, with 60% of Generation Z actively investing. It could also be argued that an investment is more necessary than ever, as the cost of living – particularly for renters – rises in populous areas.

In comparison, 33% of the ‘Silent Generation’ and 37% of ‘Baby Boomers’ are currently investing. The main driver of this trend is the low returns offered by savings accounts, which can be offset by higher earning investment assets.

But are they planning for long-term objectives? The UK is known as a nation of savers but when it comes to retirement planning, many people around the world have the same idea.

Studies show that there is a global trend of saving for retirement, and 70% of people continue to save after retirement age. Comparatively, short-term goals such as saving for a business or a larger purchase were significantly less common motives.

Why invest with a long-term goal in mind?

It’s not a surprise that for a first-time investor, or an investor that is building a larger portfolio, their immediate thoughts might not be around goals.

Why then, is it beneficial to start a property investment with one in mind?

Invest With a Clear Focus

If you understand what you’re investing for, it can make the process a lot easier, especially with buy-to-let property. This gives you an idea of what you have and what you’ll need, which can then inform how many years you’ll be investing for or spreading your mortgage across. It can also help you determine the property types you need to help you achieve your goals.

Save in Manageable Amounts

Saving in manageable amounts is a good way of reaching long-term goals as it can prevent you from being initially overwhelmed.

By knowing your long-term goal from the start, you can do the maths and work out exactly what you need to accrue each year, which can then inform your strategy.

For property investors specifically, your monthly rental income is vital for achieving long-term goals, making it incredibly important to save a proportion each month while leaving money for emergencies or as disposable income.

A Source of Motivation

Although investing or reaching financial goals can be an exciting time, it is often mundane. There will be moments where you’re tempted to not save, or feel the urge to spend that extra money, which is why having long-term goals can help you stay on track.

Having an idea of what to work towards and seeing your investment grow closer to your goal will motivate you to maintain or accelerate your investments.

What about short-term goals?

Short-term goals are an important part of the wider investment process and should support long-term goals.

Within a long-term goal, there’s always smaller milestones that can provide encouragement, direction and motivation.

The main thing to consider is that if these short-term goals are separate from long-term objectives, you still need to remain ‘on topic’. Keep your overall goal in mind and make sure they’re both manageable and realistic.

If you are interested in learning more about perfecting your long-term investment strategy, subscribe to the Joseph Mews newsletter for regular tips on setting and achieving your goals.