Setting financial goals is a crucial step towards achieving financial success and stability. However, the process of goal setting and achievement goes beyond simple numbers and calculations. It is intertwined with our psychology, and our attitudes, beliefs, and behaviours are some of the key determinants of our experience and success in pursuing financial goals. In this article, we will explore the psychology of financial goal setting and how understanding it can lead to greater success in managing our finances.
Start with Intention and Motivation
The first step in setting any goal is to define it with clarity and intention.
In order to build a map for improving your finances, you need to have a clear picture of your destination. This allows you to identify the steps needed in your financial journey, as well as your sense of purpose and motivation to undertake it.
Clarify your intentions by asking yourself, “What are your best hopes for your financial future?” Spend time on your response, building a strong visual image of your financial situation. Ensure that the elements that make up the picture are within your control (i.e., not winning the lottery). Consider not only your income and outgoings and what you will be able to do, but how you will feel in relationship to your finances, and how these feelings will enable you to act with your money.
The Motivation Equation
Motivation plays a significant role in any goal achievement. We do difficult things when it is worth it.
In the context of financial goal setting, motivation can stem from a number of sources. Some individuals are motivated by the desire for financial security or independence, while others are driven by the prospect of achieving a certain lifestyle or fulfilling their dreams. Others are focused on the opportunities that better financial stability will bring to their families. “What’s your why?” is a common phrase for sparking thinking about the driving force for goals.
An important caveat is that while motivation is powerful, it also fluctuates, no matter how significant the goal. Relying on motivation alone to take the steps and potentially make the sacrifices required in service of your financial goals is a recipe for failure. If we only do what is needed when we feel motivated, it is too easy to become derailed.
Know Thyself: The Role of Beliefs and Mindset
Our beliefs and mindset greatly influence our financial decisions and behaviours. If we hold beliefs such as "I’m bad with money" or "Money is the root of all evil," it becomes challenging to set appropriate financial goals and be willing to take the necessary steps to achieve them.
Our beliefs inform how we view money and ourselves in relation to money, and thus the way we behave with it. In order to make changes to your financial situation, it is well worth taking the time to understand the beliefs you have held around money, how those might have developed, and the consequences they have had.
With this self-awareness, you can work to develop more supportive, flexible beliefs that will assist you in thinking and behaving around money in a way that aligns with your financial goals. Be aware for signs that you might be operating from an old unhelpful mindset should it re-emerge. If you are working towards financial goals with a partner, do this work together so that you can understand and empathise with each other’s strengths and challenges around money beliefs.
The Importance of Small Wins
Big financial goals can feel overwhelming and distant, which may lead to discouragement or waning motivation. Breaking down long-term goals into smaller, manageable milestones can have a significant psychological impact. Each small win achieved along the way provides a sense of accomplishment, boosts motivation, and reinforces the belief that the larger goal is attainable.
Making the effort to notice and appreciate your financial achievements and changing behaviours supports the development of a new self-perception as related to your ability to manage money. Celebrating these small victories can also create positive associations with the financial journey, making it more enjoyable and sustainable.
Overcoming Obstacles with Resilience and If-Then Plans
Achieving financial goals is not a linear path. It is inevitable to face obstacles, setbacks, and unexpected circumstances along the way, and developing resilience is crucial in navigating these challenges. Resilience is the ability to come back from setbacks, learn from any mistakes, and adjust our strategies as needed. By reframing setbacks as expected parts of any goal pursuit and opportunities for learning, we are less likely to give up or allow a challenge to completely derail our self-belief.
One technique for managing setbacks is the “if-then” plan. Many obstacles are foreseeable, whether external circumstances or your own familiar tendencies with money. At the beginning of your financial journey, consider the likely situations that might throw you off course.
Perhaps, for example, you know you are tempted to shop online when you receive an email that there is a sale on, even if you have no urgent need for something. You might implement an if-then plan such as:
“If I receive an email about a sale, then I will immediately unsubscribe from that email list and delete it.”
“If I want to purchase something that is on sale, then I will permit myself only if it is on my list of genuine current needs.”
“If I want to purchase something on sale, then I will consult my partner/friend first to help me establish if this is what I truly want.”
“If I want to purchase something, then I will first calculate how many hours I needed to work in order to pay for it and determine if I am happy with the cost in hours as well as money.”
If-then plans can also be implemented for external circumstances, and these can help to reduce anxiety around money:
“If my income reduces for any reason, then I will speak to the bank about options for managing my mortgage payments, and reduce expenses such as finding out how to shop and cook more cost-effectively.”
“If my car needs unexpected and expensive repairs, then I will take public transport while I save to pay for them.”
As for any type of anxiety, it is important not to spend too much effort on exhaustively identifying every possible thing that can go wrong in order to plan for it. The majority of financial setbacks will be managed by reducing spending, exploring avenues for generating extra income, and asking for support from the appropriate sources (which might require you to put aside your ego). The far more important and effective way to reduce anxiety of all kinds is to have faith in your own capacity to cope and problem-solve if challenges arise.
How you speak to yourself after a setback impacts your energy and willingness to get back on course with your goals. Chastising yourself only creates a sense of hopelessness and reinforces unhelpful beliefs about your ability to manage money.
Acknowledge any understandable fear, sadness, or frustration you might feel from a financial challenge, and support yourself as you would a loved one. A financial misstep does not reflect your character or quality as a person – it is perhaps a reflection of a skill that needs to be strengthened, or a personality tendency you are working on reducing, but it does not need to dominate your self-image and self-worth.
Accountability and Support
Sharing our financial goals with others can provide us with a sense of accountability and support. It can be beneficial to find a trusted friend, family member, or financial advisor who can hold you accountable and provide guidance throughout the process. There are many online groups focused on personal finance that can offer a valuable source of motivation, inspiration, and knowledge sharing, as well as reassure you that others are on a similar financial path. Reading articles and books or listening to podcasts related to your financial goals can help you to stay focused as well as continue to build your financial literacy.
Financial goal setting is not just a matter of crunching numbers; it is deeply rooted in our psychology. Understanding yourself and the psychological aspects of goal setting can significantly impact your ability to achieve financial outcomes. By harnessing the power of intention, motivation, mindset, small wins, resilience, and external support, you can set yourself on a path to financial stability and stay the course.