The key to achieving our money goals is to use psychology to set us up for success.
When it comes to our money goals, behavioural economist Erik Vermeulen says we need to set specific long-term goals, but also have built-in intermediate success measures to make our goals more achievable, and more rewarding.
When setting your money goals, make sure they achieve the following five criteria:
Your goal must create SECURITY
Humans have a very strong aversion to loss, so goals that promote a sense of security are powerful motivators. This could be applied to having an emergency fund, for example, or to your retirement funding.
Your goal must be MEASURABLE
Decide on the amount of money you want to save and how long it will take you. If it is a longer-term goal for retirement or your children’s education in 18 years’ time, set short- or medium-term milestones to measure your progress. A good measure is checking your net worth, to make sure it is increasing each year.
Your goal must have AUTONOMY
The more control we feel we have over the outcome of an action, the more likely we are to continue taking the action. This can sometimes make market-related investments more difficult to stick to as the returns fluctuate in the short term. You need to remind yourself that for longer-term investments, short-term values are less important.
Your goal must be RELEVANT
So make it personal. If you are saving for something that is not important to you, you will probably lose interest very quickly. For many young people, retirement is so far away it is a difficult goal to hold onto. But if you re-frame it as a goal to be your own boss one day, that may keep you motivated.
Your goal must be EXCITING
Creating excitement helps to trigger the dopamine release which is a key hormone in regulating joyful behaviours. Creating plans around your goal can keep you motivated while you are saving. Spend time comparing cars if you are saving for a deposit, or do a vision board of what you want to do with your life in ten years’ time.