How to Apply Goal Setting Theory to Personal Finance
If you want to take control of your life, you will benefit from understanding and applying the principles of goal setting theory. The main premise of goal setting theory is, how well a person or an organization performs a task is directly related to goal setting. This theory states that higher levels of performance are achieved by using specific and challenging goals combined with appropriate feedback.
This sounds completely obvious, right? But ask yourself, do you have any financial goals?
A Lack Of Financial Goals
The average household savings rate in the U.S. was only 5.1% in the second half of 2022, reports Zippia. This is not good.
We have to think of the future, and the perfect time for that is NOW. Take stock of your lifestyle choices, refocus on positive financial efforts, and set goals for the future.
Let's Start Working Towards Your Goals Together
Goal Setting Theory
Goal Setting Theory originated in the 1968s from the work of Dr. Edwin A. Locke. It has been refined over the past 50+ years and has been put to practical use in many circumstances by thousands of companies and many highly-motivated individuals such as athletes and entrepreneurs.
There are five principles of goal setting theory, which are:
- Motivation:
Have a strong desire towork towards a goal.
- Clear Goals:
Have goals that are clearly defined and explicit.
- Challenging:
Goals need to be realistic and also challenging.
- Feedback:
Appropriate feedback contributes to higher performance.
- Participation in Goal Setting
Participation in goal setting leads to more engagement.
Motivation
Goals are targets. Without the motivation to shoot for the target, you are never going to hit it. As the saying goes, “You have to be in it, to win it!” Another saying that I really like is:
“The best way to predict the future is to create it.”
Do not get stuck in the “I can’t __” mindset because that is fundamentally not true if your goals are challenging and realistic.
If you are a man who is 100 lbs. overweight, you cannot have a realistic goal of becoming a prima ballerina in the Bolshoi Ballet of Moscow. However, that same man who dreams of being a ballet dancer could do so as one of the Funny Girls who perform Swine Lake.
Dividends can be better when you have to live off your investments. However, capital gains can be a better option for building wealth.
Motivation comes from a strong desire and the ability to think out of the box in ways that can make it possible. Anything is possible if you are clever about how you approach your goals.
One man’s goal was to be free of the need for money. He did not set out to win the lottery to achieve this goal. Instead, one day he simply put down the last amount of money he had and left it behind for others to find it. After that, he never earned or spent money. He lives a very simple life in a cave and finds or trades for things he needs.
He is a man who lives without money. He lived this way for the past 14 years! Pay careful attention because what others might see as a broke, homeless man is an incorrect evaluation of his true feelings about his situation. He achieved his goal, which was complete freedom from money, and is very happy about it.
Avoid negative thinking because “What you resist persists.” It is not a motivating goal to think something like, “I don’t want to live in my crappy apartment.” You will likely get stuck there for a long time or get thrown out with no place to go.
Instead, use positive statements about goals, such as I want to move-in to the new high-rise apartment building on Beacon Street (be specific) and have a view overlooking the city. Then find a photo online of the view, get a large printout of it, and put it up on the wall of your crappy apartment. One day in the future, you will look up to see the actual view instead of the photo of it. That is how to program your mind for success.
Action Plan: Get a notebook and write down your financial goals. Put photos on your wall.
Clear Goals
Clear goals are things you can imagine in the immediate moment, which are concrete, easy-to-understand, and time-based. Ideas and wishes that are ambiguous without a deadline are not goals.
Two things I often notice when I ask people about goals. One is that say something generic, like “I want to be rich.” I tell them to break it down and first tell me what it means to them to be “rich.” How would they know that they are “rich.” And then, I ask the goal-setting question, which is, “What can you do this week to start on your pathway to becoming rich?” The things that can be done in a day, week, month, or year are the keys to discover the pathway to achieve a goal.
When I first started as a writer, I did not make my goal to write one million words (although this is a goal I achieved already more than once). Instead, I wanted to write 500 words per day at first, and eventually, that daily goal became 2,500 words per day. I write every day, no matter what. If I feel terrific or if I feel sick or tired, I write.
One million words, at 2,500 words per day, takes only 400 days, which is just a little over a year. I have been writing now for decades and wrote so many millions of words that I lost count of them all. However, it was the first 500 words and then writing 500 more the next day and the day after that, which made it possible. Once I could do 500 words a day, I raised my goal by 500 words to 1,000 per day and kept raising it until I got to 2,500 words per day, which to me is very satisfying.
In finance terms, do not make the immediate goal to have a million dollars. Instead, make the goal to invest $300 per month and put aside $10 per day to get $300 every month. If you are employed in a decent job and stop eating out, you can save that much money, so you are not being honest if you say I can’t. Use a smaller amount if necessary.
Even if your goal is to buy a single share of stock each month in a long-term buy and hold effort, you will be shocked at how much value will mount up over time. If you pay $5 daily for a cup of gourmet crappacino coffee that you can just as easily skip, brew your coffee at home, and buy some stock instead.
Action Plan: You will want to set realistic financial goals and follow a budget. Make the pursuit of your goal a daily habit.
Challenging Goals
No one could run faster to break the record of a four-minute mile until Roger Bannister did in 1954. He was 25 years old and clocked his, less than a four-minute mile, breaking the barrier at 3:59.4 by a mere six-tenths of a second. After Bannister proved that it could be done, that same year of 1954, John Landy also did it.
The four-minute barrier was as much psychological as it was physical. The current world record for the fastest mile (as of February 2021) is 3:43.13. This was achieved in 1999 by Hicham El Guerrouj, who is from Morocco.
For financial goals, be specific about them, make them very challenging but not impossible to achieve.
It helps to write them on a wall chart to track progress or put up photos on the wall that you see every day as a constant reminder.
It is vital to use a financial goal planner, which is based on a personal plan to build wealth. If you already let your financial condition get out of control, which is quite common, you may need to get assistance with managing credit and debt.
Action Plan: Become part of the wise group of the one-third of American households that control finances by using budgeting tools.
Feedback
Feedback provides encouragement, creates clarity, and highlights things that need to be addressed. A budget will set the goals for monthly expenditures as a guide, and the feedback will come by comparing actual expenses to what you plan with your budget.
Be sure to include a small reward for hitting a goal successfully, even if you are the one that has to give this reward to yourself. Setting smaller goals and achieving them on a continual basis builds up your self-esteem and results in stronger self-efficiency.
Self-efficiency comes from the self-confidence of a person who has faith in their ability to perform a task. This confidence comes from meeting a number of smaller goals, and by giving yourself a reward for doing so, on the pathway to manifesting the larger success, you dream about.
Goals are timeline-based, and that requires a commitment to succeed within a certain timeframe. For continued improvement, I highly recommend you have short-term goals that can be accomplished in a single day or in a week. On your wall chart, show the weeks, and every time you make the goal for that week, which just passed, put a big star on the wall chart to indicate your success for that week. When you reach a milestone, give yourself something really special that you really like. This is another part of mind training that will help you achieve your goals.
Action Plan: Reward yourself with something when you achieve a goal.
Participation In Goal Setting
If you are working on financial goals alone, you will set the goals. Many people are not alone in terms of financial goals. They may have a significant-other person in their life or a family. If more than one person is involved in the financial outcomes, it is vital to have them participate in setting the goals.
Participation does not mean that they have to come up with the goals. However, they must “buy-in” to the goals for you to have any chance of achieving them.
It is far easier to achieve a goal when all the people involved work together.
This is more difficult than it sounds. One person who has bad financial habits can ruin the outcomes for the rest of the family.
What a person wants to spend money on is an expression of their values and priorities. A very common thing for couples is a pairing between a person who is a savings/investment type with another person who is a wild spender. This is a situation that causes big fights. It is part of the “opposites attract” phenomena that a person who likes to spend freely will be attracted to another person who is more frugal.
This has a weird logic to it because if both people in a relationship are wasteful spenders, the couple will probably face financial ruin. One way to deal with this challenge is to operate on a budget that reigns in a wasteful spender and limits the amount that they are capable of spending.
For example, they use a debit card that cannot overdraft instead of having any credit cards. If you are facing this problem, you may need to get professional couples’ counseling to work through these issues. Money can also be a tool of dominance over another person, such as controlling all the funds without allowing a partner’s input and also spending past your means to get negative attention.
Assuming you can create shared goals and work together to achieve them, then couples can reward themselves together when they meet a goal that they mutually share. This dynamic usually creates the best outcomes, so if you are in a relationship that is having troubles around money issues, your first goal may be to seek couples’ counseling to address the needs for a goal-setting process that has mutual participation.
Action Plan: Make sure all people involved in the outcomes participate in the goal setting.
Advantages of Goal Setting
Goal setting theory is used to increase the incentives to achieve the goals and commit to the efforts necessary to do so. Having goals usually creates better outcomes through increased motivation. Adjustments to goals can make corrections based on the feedback received.
Limitations of Goal Setting
If goals are not in alignment with the behaviors of others involved in a group effort, goal conflict is likely. Goal setting does not work well when those involved are pulling in opposite directions.
In such a situation, the first goal is to try to find a way to work together in a participatory way when setting goals. These interpersonal dynamics might be quite disruptive and cause a failure to achieve goals. Professional counseling may be needed and might help if this is the situation you are facing.
Be aware that very challenging goals might stimulate risk-taking or create poor decisions. For example, if a stock market portfolio suddenly loses value, many investors make the mistake of panic selling. If the long-term strategy is a buy-and-hold goal, this may significantly lower overall performance.
“The stock market is a place where few people buy when everything is on sale.”
If you invest long-term as a value investor and pick strong companies to own, you will simply buy more shares if the price suddenly goes way down. Then, you will benefit later on from the stock market rebound.
Conclusion
Goal setting is a way to achieve many things. However, there is no evidence to show that goal-setting alone is a guaranteed way to achieve satisfaction with life. This is especially true if the goals pursued do not result in the imagined success.
Now that I wrote this article of 2,500 words, I achieved today’s goal, but my true happiness is not the words written. It is that I get the reward now since I work from home and will go out into my garden to play with my dogs. The freedom to do that is what I consider a success.