Ever heard of the ‘planning fallacy’? It’s a complicated-sounding term that experts use to describe something pretty simple: humans often set goals they have no chance of achieving. In other words, we can be an overconfident bunch.
Specifically, we tend to be unrealistic when we’re planning how much we can achieve and how long it will take. For example, when we set money goals for ourselves.
To help you avoid the dreaded planning fallacy, the expert at Bridges Financial Planning have broken down the process of setting realistic financial goals into five simple steps.
1. Be specific about what you want to achieve
First up, work out what will motivate you. Be specific – specific enough that you can visualise what you’re aiming for. Where do you want to live? Which of your debts will you tackle first? What does your ideal lifestyle look like? Which specific aspect of your finances do you want to understand and manage better?
Whether your answers to these questions are humble or huge, be clear about them, rather than getting caught in the trap of just making vague wishes like “having more money to do what I want”.
2. Build positivity with quick wins
Even if you’re aiming big, it often helps to start small. The important thing is to start somewhere. What are the things you can achieve relatively quickly to build momentum and confidence? It might be going hard on paying off your credit card balances, or starting to regularly put a modest amount into a savings account that’s earmarked purely for a future goal. Pick an achievable starting point, then go for it.
3. Reality check your spending
Willpower alone probably won’t get your financial goals off the ground. In reality, many of us are in denial about how much we’re spending day to day.
But looking at hard evidence about your spending habits and where changes could be made may just give you the insights you need to start making progress.
Just one hour with a calculator and your bank statements for the last 12 months (or even a budgeting app on your phone) could make a massive difference. It will allow you to get a handle on exactly where your money is going and where you can redirect money towards your financial goal.
4. Pay yourself first
Another simple budgeting technique that can generate momentum is the simple rule of “paying yourself first”. This means that the first thing you take out of your pay check is a set amount to put towards saving before you start spending. Although remember to leave yourself plenty to cover your bills and any loan repayments.
By prioritising this one simple action, you’re taking a big step towards an invaluable habit that will start growing your wealth, without the tedious record keeping.
5. Build on your initial success
Once you’ve taken the above small steps, you can start to make more ambitious plans for the medium to long-term. This can involve bigger financial objectives, like paying down your mortgage faster, setting targets on your superannuation nest egg, or building a diverse investment portfolio.
But remember, if you have financial goals you want to achieve, you don’t need to go it alone. Have you thought about getting expert advice to get you up and running? The team at Bridges can help you take a structured approach to examining your lifestyle priorities and investment preferences.
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Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL 240837. This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner or a registered tax agent. Examples are illustrative only and are subject to the assumptions and qualifications disclosed. Part of the IOOF group. In referring customers to Bridges, Great Southern Bank does not accept responsibility for any acts, omissions or advice of Bridges and its authorised representatives.